http://www.worldbank.orgfhtml/prddr/trans/WEB/trans.htm I 8 6 q

THE NEWSLETTER ABOUT REFORMING ECONOMIES

Public Disclosure Authorized TRANSITION Volume 9, Number 5 October 1998 "We Did Not Neglect Institutional Development" Interview with World Bank's ECA Chief Economist Marcelo Selowsky Thereare tremendousdifferences among the transitioneconomies. Countnies in CentralEurope close to EU accessionare growing rapidly even faster than WestemEurope. On the other hand,the largesttransition country, Russia, is in economiccrisis. What can explainthis highly divergent performnance?What shouldhave been done differentlyin Russia? Transitioneditor, Richard Hirschler,posed these questions to MarceloSelowsky, chief economistof the Europeand CentralAsia Regionat the WorldBank. Mr. Selowskyhas done extensivewnting on macroeconomicand debt issues,and for more than a decade,focused his research

Public Disclosure Authorized on povertyissues and investmentin humanresources. He did pioneeringwork on the economiccost of infantmalnutrition and drew attentionto the needto integratesocial programs for very young children into the overallinvestment in humancapital. He served as chief economistfor the Latin Americaand CaribbeanRegion duringthat region's debt crisis.

Q. The1998 World Bank4MF Meetings about 25-30 percentof their exports. wereheld in excitingtimes: the Asian Whateverhappens to worldprices of oil, What's Inside crisisis far fromover, a worldreces- minerals,and cotton,it will also affect sionis looming;Russia's economy is theirgrowth prospects. As far as Russia disintegratingand the governmentis is concemed,inflation could accelerate RussianCrisis-Alternative still lookingfor a suitableeconomic sharplyas a resultof monetaryexpan- policy.In lightof all this,how do you sionto coverpension and wage arrears DavidsonInstitute Reports 13-16 see the prospectsfor the transition and lossesin the bankingsector. It is System 13 economiesin 1999? crucialfor Russia to strictlyprioritize Workshopon Consumerbehavior 14

Public Disclosure Authorized governmentexpenditures and quickly BankClosures in China17 A. In Central Europeand the Baltics reestablishcontrol of tax revenues.This muchwill dependon growthin Western will allowthe presentinflationary burst New GlobalMonetary Consensus? Europeand on the priceat whichinter- to be a temporaryone-aiming then to- 20 nationalcapital markets are willing to lend ward a graduallydeclining inflation rate. DHL Report:The Approaching to coverthese countries' current account MillenniumBug 22 deficits.Present growth rates will be af- Q. With hindsight,what do youthink ReadersForum 24-29 fectedif anabrupt reduction in thesedefi- of the Kiryenkogovernment's sum- RubleCollapse Revisited cits are necessary,as a resultof lower meragreement with the IMF,and the InflatedStock Exchanges exportsand difficultiesin findingexter- subsequentcommitment of the Bank VirtualEconomy-Pro and Contra nal finance.It is keyfor thesecountries to providean additional$1.5 billion Milestonesof Transition29 to intensifypolicy improvements to keep loan? With all signs indicating a attractingforeign direct investment (FDI) necessaryruble devaluation,why ConferenceDiary 31 and acceleratethe processtoward EU was the financialcommunity ready WorldBank/IMF Agenda 32 accession.Countries in the CIS border- to providebillions of dollarsto post- New Booksand Working Papers 33 Public Disclosure Authorized ing Russiawill feel the effects of the pone the unavoidable for a few Bibliographyof SelectedArticles 39 Russian crisis-Russia accounts for weeks?

Macroeconomicsand Growth DevelopmentResearch Group TheWorld Bank A. Thesummer agreement tried to rees- ernments.Out of the group,only Japan tradeprimary products (oil, gas, min- tablishconfidence in the marketsby pro- contributedto the financing package. We era Is, timber) for food, consumer viding additionalfinancing as well as neededfour players-andwe had only goods,and other manufactured prod- obtainingfrom the governmenta com- two. ucts. Of course, one cannot blame mitmentto acceleratefiscal and struc- the internationalfinance institutions tural reforms.Some of these reforms I believethat an early, orderly, and trans- (IFis)for all the problems.Neverthe- were to be institutedimmediately and parentagreement with Russia'scredi- less, do they bearresponsibility for involvelegislative passage by the Duma, tors on replacingshort-term debt with these developments? What would particularlyon the tax front. long-term dollar obliga- the Bank do otherwiseif it had the As seen at that time,there tions, at interest rate chance to start over? wasa chance-andone can spreadsthat were prevail- debatethe magnitude of that ing beforethe EastAsian A. Let me beginwith some facts.The chance-that fulfillment of contagiontook hold, would transition economiesin Central Europe theprogram could have con- havetaken the pressure off and the Baltics that have undertaken vinced marketsto reduce .n Russia's public finances marketreforms have been growing fast the extremelyhigh-risk pre- and the ruble'sexchange for severalyears-faster thanWestern mium that investorswere i rate,and helpedto spread Europe.Those that have lagged in growth, demanding-interestrates these pressuresover the suchas Romaniaand Bulgaria, are pre- on the order of 100 per- medium term. Because ciselythose that havealso lagged in the cent-in returnfor refinanc- part of the short-termdebt reformprocess. Bulgaria is nowreform- ing the maturingtreasury obligations. washeld by domestic commercial banks, ing quickly,however. Countries in the Thesematuring obligations, coming due theG-7 govemments'financial contribu- Caucasusand the KyrgyzRepublic also overthe next 12 months, were quite large tion couldhave been used to shieldde- are growingfast. So today Russiaand relativeto GDP-around 10 percent- positorsfrom a deteriorationof thebanks' Ukraineare morethe exceptionthan the and relativeto the country'sforeign ex- balancesheets. The breathingspace rule,and the questionis whygrowth has changereserves. Hence,there was a couldthen have beenused to consoli- not resumedin these countries. clear risk that the financingpackage datefiscal and tax reformsand help the wouldnot be largeenough to bolsterthe countryto move graduallytoward an Reformin Russiaand Ukraine has been market'sconfidence. exchangerate realignment.In summary, interruptedabruptly several times during we neededan earlyand orderly process the past six yearsin an atmosphereof Unfortunatelythat risk did materialize. of wideburden sharing. verysharp confrontation between the ex- Althoughthe Duma approved several tax ecutive and the legislativebranches. measures,it failedto approvethe overall As far as the WorldBank is concemed, Manypolicy reforms have beenimple- tax package, which then had to be as part of the summerpackage, only mented throughpresidential decrees passedthrough decrees. That reduced $300million of the $1.5 billioncommit- ratherthan throughlegislation, thereby the expectationsof sustainedimprove- ted underthe thirdstructural adjustment reducingthe expectations of sustainability mentsin revenues. In addition,during loan(SAL ll) wasdisbursed immediately. of suchreforms. June, the Asia contagionreached its Futuredisbursements are contingenton peakas a resultof growingpolitical and furtherprogress on the structuralfront. Russia'sinitial conditions were also very financialturbulence in Indonesia. Both differentfrom those in CentralEurope. factorsturned market sentiments further Q. Many experts are blamingthe Labormobility and restructuring became againstRussia in spite of the summer international finance institutions muchmore difficult, due to thevery large agreement. becauseseveral transitionecono- share of military output and negative mies,primarily Russia, after six to value-addedindustries, and the domi- In myview, the summer agreement with eight years of experiments with nanceof largecompany towns, the sole the Kiryenkogovernment should have market-orientedeconomic policies, employers for a whole community, beena "generalequilibrium agreement," are experiencingrampant poverty, artifciallylocated in remoteregions, origi- incorporatingnot onlythe Russiangov- lawlessness,and corruption;their nally,for strategicreasons. This is com- ernmentand the internationalfinance bankingsectors are weak, their fis- poundedby the absenceof an inherited instituttionsbut also creditorsholding cal imbalancechronic, their foreign legal frameworkthat is supportiveof short-termpublic debt and the G-7 gov- trade structureunhealthy; and they marketdevelopment and property rights.

* TRANSITION,October 1998 © 1998 The World Bank All these factors-erratic progressin Thisstate of limbois preciselywhat mo- front. But it is also an areawhere the reform and difficultinitial conditions- tivates asset stripping-in the interim initiative for change basically must have made it more difficult for these there is little interestin protectingthe come from withinthe country-thereis economiesto rapidly respondto im- capitalstock of the firm. Thisis exactly onlyso muchthat canbe achievedfrom proved incentives.This can be docu- whathappened in Bulgariaprior to 1996. the outside.Civil society first mustrec- mentedclearly by the low level of foreign ognizethe needfor legal and institu- directinvestment (FDI) and slow growth Also we have to acceptthat the Rus- tional reform.The Bankhas supported of smallfirms in Russiarelative to other sian privatizationhad its own momen- reformin theseareas but progresshas transitioneconomies. tum at that time. First,an urgentneed not been easy.Let me giveyou an ex- to get state enterprises-particularlyof ample: Since1992 the Bankhas been Whatcould have been done differently? small-and medium-scaleenterprises- workingwith the authoritiesin develop- Severalobservers have suggested that off thebooks of publicfinances. Second, ing a betterland codethat would allow slower trade and price liberalization a perceivedneed to create rapidly a for unconstrainedland ownershipand would have given money-losingenter- groupof privateowners. Should the re- freedom-for-landtransactions. However, prisesmore time to restructureand ad- formers at that time have delayed so far no consensushas beenachieved just. But this would have also slowed privatizationof smalland medium-size betweenthe executivebranch and the downthe incentives for growthfor those enterprises,waiting for institutionalde- Dumathat wouldhave allowedfor the sectorsthat hada true comparativead- velopmentand legislation in areas requir- passageof such legislation. vantage,but were represseddue to the ing parliamentaryapproval that might originalprice and trade controls.The have taken years?Was it realisticto Shouldprice liberalizationand the first downsizingand restructuringof firms- expectthat privatizationwould have ad- waveof privatizationhave waited for at while incorporatingsocial concerns- vancedwithout the supportof workers leasta minimumof progresson the in- can be betterhelped by direct budget and managersin those enterprisestar- stitutionaland legal reformfront? Can transfersto the affected communities geted for privatization?Policymaking really market-supportivelegal institu- than by slowingprice liberalizationor takesplace in the contextof windowsof tions be created before the markets coveringlosses of theseenterprises. An opportunityand not in the contextof a themselves begin to emerge? One importantobjective of reforms-sup- prepreparedsequence that theoretically needsa minimumof privateproperty and ported by the World Bank from the couldhave been more appropriate. To a depoliticizedmarkets to generatean ef- start-was to shift subsidizationfrom large extent,these processesare be- fectivedemand for market-supportivein- enterprisesto poor households and yondthe influenceof the IFIs-and they stitutions,such as independentcourts, communities.I am still convincedthat shouldbe. transparentbankruptcy procedures, and this is the way to go. the like. Greatconcems did emerge, however, re- I amaware of thecriticism of the fastand gardingtransparency, equity, and concen- Whatshould the Bankhave done differ- massiveRussian voucher-privatization pro- trationof marketpower in the second ently? In hindsightthere are three ar- gramof small and medium size enterprises stageof privatization-theloans-for-share eas in whichthe Bank probablycould withheavy participation of insidersand its programfor large enterprises.And the have pressedfor strongergovernment effecton the qualityof govemance-and Bankmade this knownto the Russian action.First, faster reforms to unbundle that perhapsthe processshould have govemmentat that time.At present,the and demonopolizethe oil and gas sec- waitedfor thedevelopment of capital mar- governmentis consideringadopting a tors,to encouragenew private investment kets,better competition laws, legislation more elaborateform of case-by-case andentrepreneurship. Second, a tougher protectingsmall shareholders, and so on. privatizationfor largeenterprises which, stanceon tax collection, particularly from But,whatwould have beenthe altemative? if implemented,should ensure much largetax debtors.And third, a fasterim- To keepthese enterprises longer in state greatertransparency and competition. provementof the prudentialand regula- ownership and move slower with tory frameworkgoverning commercial privatization?What would have been the Anotherarea of criticismis that exter- banks,including enforcement. But vested effect of that strategy?Under such cir- nal assistancefocused too much and interestsin theseareas were knownto cumstancesenterprise managers would too prematurelyon liberalizationand be strong-bolder governmentactions havebecome uncertain about the timing privatizationand less so on progress would have requireda consensuson and methodof privatization-whether on the institutionaland legal fronts. We severallevels and a muchstronger com- they would receiveenterprise shares. all hadwished for fasterprogress on that mitmentto reformby the executive.

© 1998 The World Bank TRANSITION,October 1998 Q. In particular, a revision of the pose. We have used projects and ad- term financing.Creditors will wish to see WashingtonConsensus emerged as justment operations intensively to a track record of servicing short-term an important part of the Bank's re- achieve such targeting, combined with loans before movingtoward longer-term newal process(see Transition,June technical assistance to the institutions ones. 1998). It is hoped that, with a new in charge.We havebeen involved heavily approach, more appropriate tools in assisting pension reform and in pro- Finally, let me turn to institutional de- can be applied to many of the prob- tecting basic pension levels. We are velopment. We have not neglectedthis lems of the transition economies, also assisting the restructuring and area-and neither have other donors- including: more focus on the social downsizingprocess of some industries although I am sure we should do much effects of the stabilization-liberaliza- by setting up retraining programs for more. In Russia, the Bank has sup- tion-privatization triad, control of workersin the affected communitiesand ported reform in a wide variety of areas, short-term capital movements, con- helpinglocal communitiestake over the includingland registrationinitiatives, an- fronting other undesirable side ef- social services, previouslyprovided by timonopolylegislation, shareholders pro- fects of globalization, and, greater such enterprises. The communities tection, and the like. emphasis on institutional develop- themselvesare active in designingsuch ment. Do you agree with these? programs-they are not "predetermined" IFC-a member of the World Bank in Washington. Group-has been heavily involvedboth A. You ask me about the Washington at the policy and grassroots level, as- Consensus.As far as I know,the Wash- Let me discussthe issue of controlson sisting in reform of the Civil Code, Com- ington Consensuslately has become a short-term capital inflows. Everyoneac- pany Law, securities regulations and label for a strategy aimed at achieving knowledgesthat a buildupof short-term corporategovernance training. IFC also privatization, liberalization,fiscal deficit externaldebt by the governmentor the piloted a large land reform project. So and inflation reduction as fast as pos- private sector made economies highly farthe Economic DevelopmentInstitute sible, and also makingthe state as small vulnerableto volatilityin capital markets' (EDI) has organized training courses as possible-with little regard to social sentiments. When too much capital is for about 5,000 instructors in Russia issues,human capital accumulation,and flowing to finance the fiscal deficit, the and for about 1,000 in Central Asia in progress on the institutional side. De- solutionis to reducethe deficit, not con- areas such as economics, banking, fined that way, I find it a caricature,and trol capital inflows. The situation is dif- social sector policy, and the environ- hence not a helpfulstarting point to dis- ferent when large inflows are being ment. cuss many of the policy dilemmas and channeled toward the private sector trade-offsthat are still on the table. Con- through the bankingsector. In this case A specific project has assisted Russia's sequently,I will addressdirectly the three tight prudential regulationsand limits on Security and Exchange Commissionto specific questionsyou have raised, par- short-term open positions or currency improve the regulatoryframework of the ticularly in reference to the transition mismatches of the banking sector are securitymarket. Through a LegalReform economies. the first lineof defense.Enforcement and Projectand the help of the LegalDepart- depolitizationof the supervisoryagencies ment, we are assisting in drafting new The social cost of stabilizaffonobviously are crucial. legislation and streamliningthe legisla- can be reduced by higher levels of tive process; this project has an impor- concessional external finance-we all As I mentioned earlier, we need to in- tant training and education component wish the amounts could be larger. But tensify our work in this area. The issue for judges, courts and law schools.And such amountsare limited.We have been is, whether in addition, one should im- we are in the courseof preparingsimilar very active in mobilizingdonor support, pose Chilean-stylereserve requirements projects in several other countriesin the particularlyfor the low income countries that act as a tax on short-term flows. I CIS. All these initiativeswill need time in the Caucasus,Central Asia and also believe such an idea has merits and to be effective-by their very naturethey for the postconflict countries. should be discussedwith govemments are aimed at profoundchange of behav- as an option. There are some costs: ior and habits of many actors in the so- On the domestic side, slowing down imposingataxonshort-termflowswhen ciety. Political consensus becomes a price liberalizationis not a good vehicle the private sector is starting to attract fundamentalprerequisite for progress.As for social protection. Direct budgetary such financing may prematurely kill the we move to a second generationof re- transfers through targeted social assis- learning process by which creditors forms, institutionalchange will increas- tance programs better serve this pur- graduallymove toward providinglonger- ingly become more important.

* TRANSITION,October 1998 (©1998 The World Bank Setting Russia's Economy on a New Path

One late Octoberafternoon, a remarkablemeeting took place at the WorldBank A groupof influentialRussian and U.S. economists-includingOleg Bogomolov, Stanislav Menshikov, Michael Intrilligator and Nobellaureate Kenneth Arrow-met with First DeputyTreasury Secretary, Larry Summers, and severalRussian experts of the WorldBank and the IMF The meeting-chairedby JosephStiglitz, chief economist and seniorvice president of the Bank-exploredthe causesof Russia's economicbreakdown and the necessarypolicies to overcomethe crisis.One group argued that demand-boosting measures wouldbreak the viciouscycle, and Jift Russia out of its presentquagmire. The critics,on the otherhand, insisted that within the presenteconomic structure, stimulating demand would lead merelyto higherinflation, with no appropriatesupply re- sponse.The views thus remained apart, but the dialoguecontinues, and hopefully will contribute constructively to the ongoing reassessmentof Russia'seconomic policy. The followingarticle by ProfessorNekipelov, director of a majorthink tank in Moscow,introduces interesting new elements in the ongoingdiscussion. The Editor. The Nature of Russia's Economic Catastrophe-An Alternative Diagnosis by Alexandr Nekipelov Inaccordance with the standardap- existingmacro- and microeconomicen- a financialcrisis at leastsince the fall of proachto macroeconomicstabiliza- vironments. 1997, and it entered its most acute tion 'radical reformers,'the govern- phase in August 1998.The main ele- ments headed by E.Gaidar, V. Governmentexpenditures, including mentsof this crisisare the following: Chernomyrdin,and S. Kiryenko, had con- spendingon humancapital (science, * A permanentbudget deficit and a re- centratedon fighting inflation at anycost, education,culture, and health care), fell sultingdebt crisis. believingthat when inflationwas de- to 37.8percent of the GDPin 1996(and, * A crisisof the bankingsystem, mainly feated,the economywould soon begin accordingto some estimates,to ap- linked to imbalancesbetween foreign healthygrowth. When it turnedout that proximately 35 percent in 1997), exchangeliabilities and assets. The stableprices and foreign exchange rates whereasGDP itself declinedby 36.4 banks'balance sheets include significant are notsufficient for thispurpose, it was percentduring the yearsof 'radical re- investmentsin GKOs(Treasury bonds) acceptedthat fiscal policy had been too forms."For comparison:in OECDcoun- that defaulted. softand, as a result,private investments, tries the respectiveratio is about 50 0 A foreign exchangecrisis, (it mani- whichare necessaryfor growth,were percent, and in the most successful festedthe dependenceof the modern crowdedout by the state. It followed then postcommunistcountries-the Czech Russianeconomy on the in- and outflows thateconomic growth critically depended Republic,Hungary, Poland, Slovakia and of foreignshort-term capital and the im- on fiscal austerity. Slovenia-it equalsabout 45 to 50 per- portanceof thedollar as an asset in Rus- cent. Thusthe persistenceof the bud- sia). TheKiryenko govemment hoped that bal- get deficit in Russia hardly can be 0 The constantlydeteriorating financial ancingthe budget would not only have a attributedto thesoft fiscalpolicy. Rather, positionof the real economy. positiveimpact on economicgrowth, but the budgetdeficit turned out to be quite wouldstop the outflowof foreigncapital insensitiveto cuts in expenditure.Of The government'sdebt crisis is a prod- from the short-termstate bond market course,this could never happenin a uct of the budgetdeficit that accumu- andthus would help stabilize the foreign genuinemarket economy. lated overseveral years, as well as its exchangemarket. The measures that the adventuristfinancing methods. But the earliergovernment took to increasetax PurelyFinancial Crisis? budgetdeficit itself is an intermediate collection,were purely administrative, rather than a final cause.This is why and the effect was negligible.Another The currentcrisis in Russiausually is trying to overcomethe deficit by me- sourceof revenues-theprivatization of characterizedas a purelyfinancial cri- chanicallyincreasing budget revenues state assets-was nearly blocked be- sis sincethe markettransformation of andslashing expenditures, will eliminate causeof previousscandals and a low the Russianeconomy was largelysuc- consequences rather than causes. demandfor productiveassets under the cessful.True, Russia has suffered from Russia'sfinancial crisis is notan autono-

C) 1998 The World Bank TRANSITION,October 1998 m mousphenomenon; on the contrary,it ment to the insufficientmoney supply. ket)is constantlymaintained due to the manifestsin a concentratedform the The recipe,therefore, should be to sati- abilityof the interestrate to reactimme- main flaws of Russia'seconomic sys- ate the economywith the liquidmeans diatelyto any changesin thesupply and tem. of payments,increasing the level of mon- demandof moneybalances and other etization. financialinstruments. The transmission Contraryto widespreadopinion, the core mechanism(money supply-interest of the financialcrisis is an extraordinary The radicalreformers have always criti- rate, investmentand some consumer lack of liquidity in the real economy, cizedthis approach,but they neverput demand-prices,real moneysupply, in- ratherthan the budgetdeficit. According forward a satisfactoryexplanation for terestrate) ensures that all realvariables to officialestimates, 75 to 85 percentof whythe Russianeconomy gradually has returnto theirequilibrium positions in the all transactionsin this sector are car- been transformedinto a practicallyin- longrun, whereas price is adjustedto a ried outwithout using money-either in kindeconomy. The Kiryenko govemment newlevel of nominal money supply. There the formof barter,mutual nonpayments, blamed the insufficientamount of cred- is no placehere for bartertransactions, orwith the useof moneysurrogates. This its to the realsector for the demonetiza- arrears,and moneysurrogates as sub- not only results in huge transaction tion of the economy.There was some stitutesfor insufficientmoney supply. Not costs, but also explainswhy it is im- logicto this position:lack of credit de- muchwill changif we allowfor thedown- possibleto havea majorimprovement in mandwas a resultof highinterest rates, ward stickinessof pricesin the Russian tax collectionon the basis of adminis- whichwere rootedin the huge budget economy,because of itshigh level of mo- trative measures:no tax policecan ex- deficit.This position supported the gen- nopolization.For instance in the caseof tracttaxes (at leastin moneyform) from eral ideaof concentratingall the efforts falling money supply, the difference enterpriseswhose profits (if any)are the of theexecutive power on toughening the would consistof a smalleroutput and result of a surplusof accountsreceiv- fiscal policy. higherprices, as comparedto a perfect able over accountspayable. And vice marketstructure, but not in a money versa,it is obviousthat the statebudget But it is easyto provethat this position shortage. wouldbe funded with a massiveinflow of is unfounded.First, it is difficultto com- taxes,if the lack of liquidityin the real prehendthe mechanismthat transforms The emergenceof an in-kindeconomy economywere overcome. the lackof creditsinto the weak liquidity in Russiacannot, therefore, be explained of the real sector.The fact that enter- on the basisof the theoryof the market Mysteryof LiquidityCrunch prise 'A" has not beengranted a bank economy.This does not meanthat the creditto financeits currentneeds in no latteris false;the realsector, stripped of Thusthe lack of liquidityin Russianen- way means that its suppliersshould money,is a productof deepdeforma- terprises,rather than the lack of politi- automaticallyextend this credit them- tions in the foundationsof the Russian cal will, was the real reasonfor their selves.Second, bankers are awarethat economicsystem, its quasi-(or pseudo) failureto consolidatethe financialsitua- theircredit can help a customerbuy the marketnature. There is noneed to deny tion. In order to restoreliquidity in the necessaryinputs, but does not guaran- the facts:a gap betweenprice level and realeconomy, one has to understandthe tee marketabilityto a product.Thus the moneysupply is a reality in Russia, originsof this phenomenon.Many be- lack of liquidityin the real sector is a whereasmutual arrears-bartertransac- lieveit is linkedto insufficientmoney sup- verystrong obstacle against moving loan- tionsand the like-adjust ourenterprises ply; there is too little money in the able fundsthere, rather than the other to demandconstraints. But this type of economyrelative to the existingprice wayaround-the lack of creditbeing the adjustmenthas little to do withthe stan- level (holdingthe level of output and main causeof arrears.The radicalre- dard behaviorof marketagents under moneyvelocity as given).These schol- formers'explanation of insufficientliquid- similarconditions (letting prices down, ars usuallyrefer to two major facts: a ity of thereal sector is nothingmore than reducingoutput, or both). drasticreduction of moneysupply in real a variationof the conceptthat the Rus- terms duringRussia's reform process sian economysuffers from an exces- Consequencesof a QuasiMarket and a very smallratio of M2 aggregate sivelyrestrictive money supply. to GDP,as comparedto developedmar- Demonetizingthe economy(though one ket economies.From this perspective, In a genuinemarket economy such a of the mostimportant) is onlyone mani- nonpayments,barter transactions,and phenomenonas 'shortage of money"is festationthat Russia'seconomic sys- moneysurrogates are simply substitutes simplyimpossible. Equilibrium in finan- tem has a specific character. Under for cash;they are resultsof the adjust- cial markets(including the moneymar- normalconditions, the profitability of cur-

* TRANSITION,October 1998 C) 1998 The World Bank rent assetsis lower than that of fixed sia, propertyrights reform was pharac- They,therefore, consciously exploited assets in enterprisesfunctioning in a terized by: total and logicallyinexpli- the quasi-marketnature of the economic market economy: otherwise nobody cableignorance of the needto control systemthey created. would investin fixedassets. For years theseassets that still belongto thestate the situationin Russiahas been totally and a purely political approach to CollapseWas Inevitable different:the yieldof marketablesecuri- privatization.A purelypolitical approach ties has been manytimes higherthan to privatizationmeant that the reformers Almost all market institutionsare for- the rate of return in production.Under attachedmaximum importance to the mally in place in Russia-a two-tier these conditions, money has been speedof theprocess, believing thatwhat- bankingsystem, all majorfinancial and pumpedout from the realsector of the everwas responsiblefor theprimary dis- tradeintermediaries, and stock and for- economyinto the financialsector, but tributionof publicwealth in private hands, eign exchangemarkets. But this mar- enterprises,manifesting awonderful abil- afterprivatization the market mechanism ket infrastructure is little more than ity to ignorebudget constraints, contin- would redistributethe rest to the most Potemkin'svillage. Commercial banks uedto function.Taking this into account, capableentrepreneurs. The resultwas havenever extended much credit to the it shouldbe absolutelyclear how inad- that the managementstaff of most big real sector of the economy.First they equateare the proposalsto satiatethe and medium-sizefirms found itself un- weremaking money on high inflation and productionsphere with money(no mat- supervised-afunction of the ownersof foreign exchangespeculation, then on ter how this aim is to be achieved- capital(either state or private).This ex- extremely profitableGKOs. Some of whether due to Central bank or plainsthe distortedeconomic behavior them(those belonging to the'oligarchs") commercialbanks' actions). of enterprises,including supplies of hadthe privilegeof maintainingand ser- goodsagainst nonpayments or money vicing governmentaccounts. By artifi- The quasi-marketnature of the Russian surrogates.The asset-stripping epidemic cially slowing the settlement of economyhelps to explainits sometimes in both state and privatized firms payments,these banks gained additional strangereactions to standardapplica- (criminalizationof economicactivity) is sourcesfor short-termspeculative in- tionsof fiscaland monetarypolicy. Un- rootedin the inadequatecorporate gov- vestments.The banksbought industrial der a market economy,reduction of ernancesystem established in Russia firms becauseof expectationsof huge governmentspending cannot lead to a duringthe reformof propertyrights. capital gains,resulting from the initial growingbudget deficit (though it is ac- heavyunderpricing of assets(often the ceptedthat the absolute volume of taxes Unusualbehavior of the govemment(at privatizationprice was much lessthan can decline,but to a lesserextent than thefederal and regional levels) is alsoa the firm's liquidationprice). The stock expenditures).However, if a substantial specificfeature of our economicsystem: market,in its turn,has never played any numberof firms lack hardbudget con- includingthe systematicbreaching of its role in allocatingresources-being a straints,the resultof suchfiscal auster- owncommitments (huge arrears in pay- playgroundfor speculationon the shares ity is not so obvious. A decline in mentsof stateorders, salaries of those of severaldozen enterprises that produce govemmentexpenditures can producea whowork in thebudget sphere, pensions, and exportraw materials. surgein nonpaymentsand, as a result, and the like) and the coercingof busi- a muchsteeper fall in tax collecfionthan nessesto supplygoods or servicesto Thiswas a consequenceof a deeplyer- in the case of a 'normal" market customerswho do not have moneyto roneousstrategy for markettransforma- economy. payfor them.Nonpayments by the state tion in the Russian economy. It is in largepart causedthe arrearsin the impossibleto maintaina normalfinan- Naturally,to acceptthe existenceof the realsector. If suchgovernment behavior cial infrastructurealong with a demon- Russianmarket anomaly is onlythe first tookplace in a genuinemarket economy, etizedreal sector of theeconomy. Strong step. More importantis to determine the resultwould be massbankruptcies incentivesfor the financialand trading what factorsgenerate it. The Russian of thoseenterprises that had contracts sectorsto servethe processof wealth postcommunistexperience shows that withthe govemment(as well as of their consumption(rather than wealth cre- undercertain condifions, even privatiz- credltors)rather than demonetization of ation)and redistribution have been built ing a significantportion of state assets thereal sector of the economy. The para- into the system.It helpsto understand may not be enoughto guaranteegenu- dox is that based on their experience, theunprecedented high real interest rate ine market transformation of the ourradical reformerswere verywell aware thathas been holding for yearson a level economy. As a consequenceof the of the unusualreactions of Russia'sreal manytimes abovethe rate of returnin massprivatization thattook place in Rus- sector to such governmentbehavior. the real sector.

C)1998 The World Bank TRANSITION,October 1998 Of course,such a mechanismof eco- nomicannihilation could not go on for- ever.The governmentincreasingly was Blueprint of an Economic Strategy unableto finance basic social needs (alongwith drasticallyreducing expen- In lightof the diagnosis,we are suggestingthe followingtherapy. ditures)and was forcedto lean heavily on domesticborrowing. This pushedin- Changingthe behaviorof economic speciallyinstituted state holdingcom- terestrates further up and madeservic- agentsand overcomingthe crisis of pany(an alternativesolution-by a num- ingof domestic debt increasingly difficult. arrears. ber of such companies). Concrete Inorder to makeborrowing cheaper and mechanismsproviding for thiscompany thus facilitatethe servicingof debt,the Amongthe measuresnecessary to pro- havebeen elaborated, following the tar- governmentand the Centralbank, in vide for markettransformation of the getof networth maximization. It has also 1996, decidedto open the securities Russianeconomy, corrections in the beenshown that sucha statecompany marketto foreignshort-term speculative propertyrights aimed at establishingef- shouldin neverbe subordinatedto the capital. So a strategic decision was ficientcorporate governance should play executivepower, rather, it shouldhave a taken based on purelytactical consid- a key role. Puttingthe managementof statussimilar to thatof the centralbank. erations.Though it was advertisedas a joint-stockcompanies under the control newimportant step toward economic lib- of theowners of capitaland making them It is alsoextremely important to change eralization,it was in fact the lastmeans maximizethe profits (in the short run) radicallythe relationsestablished be- of prolongingthe existence of an absurd andthe networth of the firm (inthe long tweengovemment bodies at different lev- economicsystem. run) are subjectto the solutionof two els andeconomic market agents. True, problems.The first one is theintroduction very oftenauthorities use theirpower in A massiveinflow of foreigncapital did of legalmechanisms providing for share- a way that is totally incompatiblewith occur.Reserves of the Centralbank in- holders to fulfill their functions as the principlesof a marketeconomy (that creased, the ruble supply began a bysubessowners. These mechanisms is, not respectingtheir own contractual steadyincrease without any immediate are being institutedand the task is to obligations,forcing firms to supplygoods dangerto the exchangerate and price completeit successfullyand quickly. The and servicesto insolvent,but "socially stability(though without any positiveef- secondproblem is, undercurrent condi- important"enterprises, executing admin- fect on thelevel of "monetization"of the tions,the mainone, though not enough istratvepressure to preventfirms from realsector), interest rates began to fall. attentionis being paid to it-the intro- reducingtheir personnel even when they However,tax collectiondidn't improve. ductionof a systemthat wouldguaran- have no possibilityto sell their output, Commercialbanks were quicklymoving tee a market-compatiblestyle of asset and so on) becausethey haveno other in a highlyleveraged position, drawing managementby a specificowner, the ways to addressimportant economic heavilyon foreignexchange borrowing RussianState. and socialissues. This behavior,there- to financeever-increasing investments in fore, turns out to be a naturalway to GKOs. The governmentis still the mainowner. operatein an irrationaleconomic sys- Accordingto someestimates, up to half tem. But it is also true that continuing It would be a great mistaketo believe of all assets, including significant such actionscan onlyfreeze the exist- thatif it were notfor theAsian crisis, the shareholdingsin privatizedfirms, belong ing impasse. economicsituation would normalizein to the State.The absenceof a rational Russia.Not at all! The stock of short- system of state assets (in particular, It is justifiableto introducea procedure term foreigncapital invested in govern- state-ownedshares) management de- thatwould automatically trigger the print- mentsecurities would have stabilized at formsthe behavior of largeand medium- ing of moneyat those timeswhen the some interest-ratelevel, and the prob- size Russian enterprises.The usual federalgovemment cannot honor its com- lemof financingthe budgetdeficit would decisionsof managersare often possible mitments.Such a measurewould raise have beenreproduced at a new level. onlybecause one of the biggestshare- the govemmentsresponsibility radically Withinthe pursuedcourse of reforms, holders-the State-shows no interest ratherthan lead to growinginflation. It sooneror later,financial (or social,in the in howits capitalis used. wouldcreate conditions for the Russian caseof excessivecuts in budgetexpen- economyto functionaccording to mar- ditures)collapse would have become in- The situationcould be remediedif all ketprinciples, and thus it wouldeliminate evitable. state-ownedshares were managed by a the systemiccauses of "demonefization"

a TRANSITION,October 1998 © 1998 The World Bank of the realeconomy. Under rigid control procedure.Taking into accountpossible attitudetoward banks' investmentsin of the ownersof capital,firms will not inflationarypressure as a result of the the stocksof domesticand especially supplygoods to insolventpartners; those overallarrears set-off, the following mea- foreigncompanies seems to be expe- whodo will go bankrupt. suresseem useful: dient. The usefulnessof banks'partici- OFreezingprices for severalmonths pation in privatizationis oftenjustified Measuressuch as prinfingmore money, *Restoratinga foreign exchangerate by their abilityto playthe roleof a stra- althoughnecessary, are not sufficient. corridorto providean anchorfor domes- tegic investorand thus to provideeffi- This is because'reformed enterprises" tic prices cient corporate governance. This will not be ableto overcomethe lack of * Adjustingthe economyfor inflation argumentturned out to befalse because liquidityin the real economy.Declaring throughsuch measures as aninflation-ad- so far bankshave investedin produc- bankruptcycan hardlysolve the prob- justedaccounting and tax system and the tive assetsseeking huge capital gains lem:there was so muchdemonetization automatic indexation of nominalcontracts. exclusively.On the other hand, the vola- in that it was leadingto completedisor- tility of stock market prices makes ganizationand chaos.I do not believe Normalizingthe financialsphere sharesa riskyinvestment and thus un- thata gradualsaturation of the economy derminesbanks' safety. It would,there- withmoneythroughtheoperaffonsofthe It makesno senseto blamethe finan- fore, be advisableif commercialbanks Centralbank wouldsolve the problem; cial intermediariesfor the lack of credit concentratedon extendingcredit to the economycan't wait. A radicaldeci- to the real economywhen speculative firms to financetheir workingcapital sion is required:clearing the financial investmentsare not only much more prof- needs.The mainproblem with this ap- fieldwith an overall mutual nonpayments itable, but less risky.The above-men- proachis that it needsa lot of money set-off in a one-strikesaturation of the tioned measures aimed at genuine which, under the currentfiscal crisis, real economywith money,according to markettransformation of the Russian only can be printed.According to an marketrules. Technically it meansthat economyand its "monetization,"with the estimateannounced by FirstVice-Pre- mutualarrears of all economicagents aid of the overall arrearsset-off can mier Maslyukov,approximately 60 bil- are nettedout simultaneously.The ac- changethis situationand overcomean lion rubles(about 2.5 percentof GDP countsof thosewith a positivedebt bal- abyssbetween the spheresof financial or 30 percent of base money) are ance (receivablesexceed payables) and trade intermediation,on the one neededto bailout a minimalnumber of shouldbe automaticallycredited with the hand,and production,on the other.Un- bigbanks. That is whyanother approach respectiveamount. If the debt balance fortunately,now we are facingnot only deservesattenfion. is negativeit shouldbe transferred to the systemicfinancial problems, but crifical government,which, in accordancewith currentissues linked to the collapseof *Taking advantageof Sberbank,a its industrialpolicy priorities and finan- thebanking and, as a result,of the settle- uniquequasi-state savings bank with cial resources,would decide whether it mentof paymentssystems that put the branchespractically everywhere, a par- wantsto transformit intolong-term credit, economyon the edgeof chaos. allelsystem for settlement-of-payments convertit intoownership, or allowrespec- could be quicklyestablished. To make tive enterprisesto go bankrupt. Strategically,two mainapproaches can it absolutelysafe, a 100percent reserve be used nowto remedythe situation: requirementsfor transferabledeposits in It is importantto assurea simultaneous Sberbankcould be introduced, which, of clearingof wagearrears. Simple money *The first,standard one consists of ap- course,would meanthat the clearing prinfingby the state, in orderto paywage plyingselective bail out proceduresto serviceswould require payment. Partici- arrearsof defaultedenterprises, could the bankingsystem. Saving the mini- pationin thissystem ought to bevolun- destroythe consumermarket. In con- mal numberof banksnecessary to re- tary,with the old oneremaining in force, trast to the realsector, this increasein storea normalsettlement-of-payments based on partialreserves. This acfion is the moneysupply is not a substitutefor system may be accompaniedby their designedto givethe Centralbank and nonpaymentsand moneysurrogates. temporarynationalization. Along with the governmentan opportunityto de- Therefore, noninflationary methods the introductionof a set of measures cidecalmly what to dowith the collapsed shouldbe preferred.For example,the elaboratedby the Basel'scommittee on bankingsystem without running the risk workers(or specialinstitutions acting on bank supervision(1997), some addi- of chaos.Its realizationcould drastically their behalf) shouldbe entitledto ex- tional stepsprobably will be necessary reducethe amountof moneythat must changewage arrears for stockson a fa- to improvethe safetyof thebanking sys- be printedjust to restorethe settlement- vorablebasis or to initiatea bankruptcy tem. In particular,a reconsiderationof of-paymentssystem.

C)1998 The World Bank TRANSITION,October 1998 Stabilizing the foreign exchange Accordingto Chase ManhattanBank, billion.Undertheseconditionsitseems market fromAugust 1998 to the endof 1999the necessaryto take urgentmeasures to Russiangovernment has to pay foreign stopforeign currencies(first of all, the Collapseof the foreignexchange mar- creditors$22.3 bililion, from August 1998 U.S.dollar) from beingone of the most ket requiresurgent measures. The situ- till August1999, whereas for the same important assets in the Russian ation is aggravatedby the extreme periodRussian commercial banks and economyand limitingtheir role to in- complexityof servicingthe foreigndebt. othereconomic units have to pay$16.4 ternational payments.An obligatory

Russia's Economic Program

KommersantDaily, the Moscow-basedbusiness paper, pub- evasion. lishedend-October the latestversion of the government'slat- * A state-owneddevelopment bank will be setup-operat- estversionof the anticrisis plan It callsfor someprice controls, ing on a commercialbasis-to financeprojects in the real paymentof backwages to workers,and the revival of Russia's economy.A state-ownedinsurance and guaranteeagency depressedindustries. Some major points of the plan: will backup this activity. 0 As of Octoberthe government will guarantee full payment * The rublewill havea floatng exchangerate. Economic of currentwages and pensions.It will continuepaying back and administrativemeasures will be undertakenagainst wagesand pensions,and will pressureenterprises and indi- banksand otherinstitutions that launchspeculabive attacks vidualsfor timelypayment of wages. on the ruble. * Pricecontrols will be introduced,and the pricescharged * Obligatorysales of hardcurrency by exporterswill be raised by natural monopolies,such as heating,electricity, train to 75percent of their hard currency receipts. The time frame for fares,will be frozenuntil January 1 (variant-untilApril 1). A hardcurrency receipts to be tumedin will be shortenedfor cap on price markupswill be introducedon sociallysignifi- manysectors, including to 30 daysfor oil and gasexports. cant goodsat 20 percentover wholesale prices. * From January1, 2001, the Centralbank will rescind * Shortagesof medicinesand food will be alleviatedby licensesof bankswith capitalof lessthan one millionecus grantingcredits for the purchaseof essentialgoods and pro- and of nonbankcredit institutionswith capital less than vidingstate support to manufacturersof suchgoods. A pre- 100,000ecus. In the meantime,the commercialbanking viouslyimposed additional 3 percentimport duty on essential industrywill be restructured.The central bank will issue cred- goodswill be eliminated. its to banksthat offereither hard currency as collateralor a * The governmentis expectedto cleardebts from state- controllinginterest in theirorganizations. Hard currency op- controlledcompanies by allowingthem to cancelout mutual erationsof commercialbanks will be strictlycontrolled. debtsand use bartermore extensively. * Russia'sfrozen state securities will be restructuredand secondarydebt trading will resume.A unified system to moni- RussianFirst Deputy Prime Minister Yuri Maslyukovsaid, on tor and manageRussia's state debt will be establishedand November2, that Moscowplans to print12 billionrubles by will includethe debtsof regionaladministrations, enterprises, year-endto payoverdue wages to soldiers,teachers, doctors, and banks. andothers in the statesector. Maslyukov said also that the * All budgetreceipts will be transferredinto a singleac- Kremlinwill pnnt more money next year if intemationallenders countunder the controlof a federaltreasury. don'toffer the govemmentnew loans. The IntemationalMon- * A restructuredand simplified tax systemwill include: etaryFund (IMF) said that an economicprogram announced -Gradually reducingthe value-addedtax (VAT)and elimi- by Moscowdoes not go far enoughto securethe newloans. natingit on purchasesof foreignfirms whenadvance pay- TheIMF urged the govemment to comeup with a realisticbud- mentis madeto exporters getfor 1999before it wouldconsider restarting the stalled dis- -Cutting profittax from 35 percentto 30 percent,with up to bursementof a $22.6billion loan packageagreed to in July. aboutone-fifth going to the regions (TheIMF withheld a $4.3billion loan due in Septemberafter -Eliminating tax on profitsreinvested in industry Russiadefaulted on domesticdebt and imposeda 90-day -Introducng property tax equal to 0.5 percent of the moratoriumon the payment of someprivate foreign obligations.) property'smarket value. -Imposing higherpenalties for late tax paymentsand tax Basedon newsagency reports.

11 TRANSITION,October 1998 © 1998 The World Bank sale by the exportersof all foreignex- Transitionto economicgrowth of pushingup governmentexpenditures changerevenues at marketrate ought or radicallyreducing the tax burden.A to be introduced(according to Poland's The governmenttraditionally has linked simpleincrease in moneysupply would experience,existing foreign exchange economicgrowth to an increasein the immediatelyundermine the fragile sta- accountscould remain, but new inflows volumeof investments.At thesame time, bilityon the foreign-exchange market and of foreign exchange should be ex- it is believedthat under no circumstancesquickly reduce the foreign-exchangere- cluded). Foreign exchange may be are domesticsavings, even if completely servesof the centralbank. acquiredonly againstimport contracts transformedinto investments,sufficient and foreignexchange liabilities. In or- to settlethe country'sproblems. That is What this reallymeans is that in a two- der for these measuresto be effective, whythe governmentalso strove to attract sector,(monetary and in-kind) Russian it is criticallyimportant to establisha large-scaleforeign capital and seconded economythe standard multiplication rigidcontrol of currentforeign exchange the opennessof Russia'sfinancial mar- mechanismdoes not work,as it would transactionson the basisof reliablein- kets. in a genuinemarket economy:rubles formationflows betweencommercial spent by the governmentimmediately banksand customsauthorities. No ob- The Departmentof Economics,with its returns,either attractedby high inter- staclesto transactionswith foreignex- memberresearch institutes at the Rus- est rates such as short-termTreasury changeby privatepersons should be sian Academyof Sciencesare consid- bill (GKO) investment(before August imposed. eringa differentpattern of transitionto 17) or throughforeign-exchange invest- economicgrowth-and I share their view. ment (to the centralbank). Oncethe Takinginto accountthe extremegrav- Accordingto this algorithm,initiation of economybecomes a genuinemarket ity of the current situation, it seems economicgrowth in thefirst stage should economy,the demonetizationof the justifiableto considera forcedtransfer resultfrom increasedutilization of exist- real economyis eliminated,a natural of all foreignexchange deposits of Rus- ing industrialcapacity due to stimula- balancebetween the return on finan- sian bankswith their foreign counter- tion of currentexpenditures. Such an cial instrumentsand productionactiv- parts to, say, Vneshtorgbank or approach is by no means directed ity is established,and the functionsof Vneshekonombank(Foreign Trade againstinvestments, including foreign the foreign currencyare limited to in- Bankor ForeignEconomy Bank). For- investments.The so-called'paradox of ternational payments,the multiplica- eign investmentsby Russiancommer- thrift'was formulatedlong ago by mac- tion mechanismcan functionagain. cial banksshould be forbidden,as well roeconomictheory. According to this as their investments in foreign ex- theory,with the availability of freecapaci- One of the government'scounterargu- change.The governmentand the cen- ties,stimulating current consumption is ments is that no morefree capacities tral bank ought to discontinue their moreuseful than stimulating savings and are left that couldbe usedefficiently in .good-natured" attitudetoward liberal m foreigncapital transfers. Aftertheex- investments.Although under such policy a marketenvironment. True, under the foretign fcapi trasextrsaftrdnta thege- the ratio of savingsfalls, its overallvol- current openness of the Russian pirationsipof redontexgustradin regu- ume does not fall becausetotal output economynearly all our processingin- batiosefimpos ontroAugu1versitn mi increasesas a resultof betterutilization dustryhas become noncompetitive. But Tobin'stax to limit in- and outflowsof of existingcapacities. This is not an the countryought to make a choice: short-termTorin'sttaxforeigntorlimgn- speculativespeculand ou capital. pitfoo abstracttheory. In thosepostcommunist eitherto acceptthe fact that for a long countriesthat are now on the track of time it will be deprivedof significant Thesemeasures that lim.tthe functions economicgrowth, the expansionbegan scientificand technologicalpotential, of foreign exchange in the Russian beforethe increasein investmentstook or to pursuea seriousindustrial policy, economyand the inflows of foreignshort- place. njarv ~~~~~~~whichwould include the well-devised and accuratelyadministered protection term capitalwill by all meansexercise an effect on the rublesexchange rate. Whatmust be doneto stimulatecurrent of nationalproducers. This is of course Afterfinding its new equilibriumlevel, it consumption?A standardsolution is to a normativechoice, but the resistance wouldbe importantfor achievingmacro- increaseaggregate demand by loosen- that our "reformers"have encountered economicstabilization by reintroducing ing somewhatthe fiscal or monetary in this particular field since 1992, the foreignexchange corridor. This, of policy.Its inapplicabilityto the modern makes me believe that the society course,raises concern about the need Russianeconomy is obvious.The bud- would decidein favor of savingthe na- to accumulatesufficient foreign ex- get deficitand the acute debt crisisof tional industryeven at the expenseof changereserves. the governmentexcludes the possibility additionalcurrent costs.

(D1998TheWorld Bank TRANSITION, October 1998 Industrialand socialpolicy Efficientindustrial policy involves the ap- tioned measuresof selectivestructural plicationof extremelydifficult decisions. policy,can sharpenthe unemployment In contrastto theexecutive power, the re- The economyhas been so weakened problem.This meansthat the elabora- searchinstitutes that belongto the Eco- that it hasbecome hopeless to retainall tion andenactment of an efficientsocial nomicDepartmentof the RussianAcademy those industrieswhich, under other cir- safetynet is one thing that will deter- of Scienceshave always opted for theac- cumstances,could have been useful. minethe successof the neweconomic tiveinvolvement of govemment in themar- The limitedresources have to be con- course.Implementation of the proposed kettransformation of the economy-for the centratedin thosefew areasthat prom- approachto economicand social policy concentrationin the government'shands ise a chancefor Russiato fall backinto involvesthe large-scale redistribution pro- ofseriousfinancialresourcesneededtopur- the ranks of economicallydeveloped cessesthat can be carriedout onlyby sue a well-designedindustrial and social countriesin the foreseeablefuture. A set the executivepowers-both federal and policy.This position was notthe old-fash- of industrialpolicy instruments ought to regional.That is whythe need to increase ionedworshipping of the economiccenter, includestate procurementorders (with significantlythe governmentoutlays butanacknowledmentofthedeeppagthatguaranteed payment), tax benefitsand (compared to the GDP), should be existedbetweenthe actual structure of tech- subsidies,measures aimed at support- openlyacknowledged. The rationaliza- nologicaland industrialpotential inherited ing exportsand tariffs, limitingimports tion of our economicsystem and over- fromthe Soviet Union and the market crite- in selectedareas, providing incentives comingthe liquiditycrisis will enableus riafor resourceallocation. We havebeen for the formationof competitivefinancial to achievethis goal withoutincreasing surethat rationally doling-out the impact of and productionstructures for the inflow the tax burdenand exceeding a budget marketforces would not onlyreduce the of foreigndirect investments, and so on. deficitthat is acceptablefrom a macro- numberof socialconflicts during the trans- They will not underminethe market economicperspective. formationperiod, but it wouldalso provide mechanismby reallocatingresources. an adequateplace in theintemational divi- Settingup hightariffs to protectselected ProfessorNekipelov is directorat theIn- sionof laborfor Russia,and make it pos- industriesshould come simultaneously stitute for InternationalEconomic and sibleto preservethe bulkof humanand with a firm time schedulefor gradually PoliticalStudies, Russian Academy of physicalcapital. reducingthem to normallevels. Only in Sciences,Moscow, Russia. this way will it be possiblefor the re- Theresearch institutes mentioned above spectiveindustries to adjustto, rather Thispaper was presentedat the Sec- constantlywarned about the strategicin- thanbe isolatedfrom, the worldmarket. ondBoston Seminar on EconomicGlo- adequacyof focusing production on a raw balization, Boston, 23-25 October material,whichwouldbecomeinevitableGenuine market transformation of the 1998, fax 095-310-7061, E-mail: if Russiafollowed dogmatically the prin- economycoupled with the above-men- [email protected] ciples of laissez-faire.We noted fre- quentlythat by refusingto participatein Announcing an Anti-Crisis Program the process of economicand social transformation, the authorities doom ^/

themselvesto playing the role of a fire . - - brigade,rushing from one burning house I to another.So manyyears of irrational economicpolicy could not havepassed

withoutgrave consequences. A lot of pro- ... -

duction sectors that, after adequate re - .

structuring, could have played an -- .-..- importantrole in a newmarket economy, havebeen destroyed, others are on the )l(z 1

brink of disappearing.The risk of remain- &f4 1 A ing for decadesin the rearguardof the internationalcommunity is a real possi- =4a bility for Russia. Instituting radical changes in the country's economic courseis the onlyway to resistit. Fromthe Budapest-basedmagazine Hungarian Economy

* TRANSITION,October 1998 © 1998 The World Bank William Davidson Institute The Dangers of Ignoring Russian Communitarianism by Charalambos Vlachoutsicos

hereis mountingevidence that munityin the medievalforest depended elementsevolved as a centraldistinc- Western managementconsult- onextraordinary group cohesion and dis- tivefeature of Russianculture. ants, trainers, and businesses cipline.The membersof each commu- operatingin Russiaface serious, unfore- nityneeded to bandtogether to fell the The sovietsystem ursurped age-old in- seen problemsin interactngeffectively forest,till thesoil, harvest the crops, and stitutionsand tried to adjust them to with their Russiancounterparts. Many protectthemselves from invadersand suit their purposes.In manyimportant of these problemsstem from mutual marauders.In the tight village commune waysthe sovietsystem stifled the genu- misperceptions,which ensue from the eachmember being protected by fam- ine aspectsof the communitarianvalue fundamentaldifferences in eachother's ily andneighbors, felt safe and secure. system and, throughthe suppressive economicand politicalsystems, infra- Theculture was marked by extremeaver- mechanismsof the CommunistParty, structures,national and businesscul- sion to change,risk avoidanceand a erodedits grassrootsparticipation into tures,as well as managerialvalues and strongtendency to maintainstability. As powerless,fake rituals.The sovietpo- practices.The Russiancommunitarian a result,while the group took priority over liticalculture that emerged was marked valuesystem, comprising cultural values, the individual,each memberwas indis- by many features of the traditional normsof behavior,and politicalas well pensablefor the survivalof the group. communitarianvalue system that-al- as geopoliticalpattems, proved to be an Therefore,the communityhad to strive thoughperverted -in some waysmay enduringfeature of Russiansociety. It to balancethe interestof all its mem- be seen as its continuation.The work- predatedcommunism and has remained bers. ers' collectivesinstituted in Sovieten- a major social force in the terprises,by includingeveryone working postcommunistera. Industrious,efficient village house- in the enterprise,from blue-collarwork- holds,capable of survivingand improv- ers to top management,incorporated Its roots date back to the Kievan ing their economiccircumstances had the Sovietversion of the principlesand state,which rose in the 9thcentury. The strictlimits set on the extentof theirself- practicesof the Russiancommunitarian essential features of the Russian improvement.Those who were threat- valuesystem. It constitutesan example communitarianvalue system are derived ened by disaster, illness, or even of howthe bolshevikstried to capitalize from institutionsthat developedin re- characterflaws and were, therefore, un- on the strengthof the traditionalvalue sponseto thefocal need for survivalun- ableto surviveon the land originally allo- system. der the adversegeographical, climatic, catedto them by the villagecommune and economicconditions that prevailed (mir),were providedfor with additional Beliefin communismhas sincerap- in KievanRussia. Kievan Russians in- meanstaken from the mostsuccessful. idly eroded,but the coreof the original habitednorthern land covered by great Nevertheless,each individual was indis- communitarianvalue systempersists. primevalforests, which concealed poor, pensablefor the survivalof the group, Whilethe effectvepower of theworkers acid soil and a swampyterrain. Long, therefore,the communityhad to strive to initiatedecisions is limited,their power dark, and bitter cold winterswere fol- to balancethe interestsof all its mem- to block them, especiallyin state and lowedby destructivespring thaws and bers.A uniqueand apparently contradic- privatizedenterprises, still remainsde- shortsummers with goodweather spells tory combinationof suppressionof the cisive.Movements of the 'invisiblehand" of unpredictableduration. The hardships individualand considerablefreedom of of the market economy are being causedby scarcityhave been greatly expressionevolved: members openly thwartedby the 'invisiblefist" ofthe tra- aggravatedby Russians'isolabon from anduninhibitedly exercised their rightto ditional communitarianvalue system. the outsideworld-either due to inac- articulatetheir interestsand opinions Workers'tolerance, if notsupport, gives cessibilitybecause of prohibitionof for- beforedecisions were made.However, top managersgreat political presence eigntravel. oncea decisionhad been reached, they with centraland regionalgovernments. wereobliged to abideby it. Thusan ap- (Throughstock accumulation,worker The biological, economic,and social parentlycontradictory and uniquecom- proxies, and other means,managers survivalof the individualand of the com- bination of centralist and grassroots have steadilyincreased their share of

( 1998 The Worl Bank TRANSITION,October 1998 ownershipin mostof the 126,000enter- onhow a target set bythe leader can best ment systemof Russianenterprises is prisespfivatized, which account for about beachieved. Therefore, such decisions are thepanacea for all problems.Neither do 70 percentof Russia'sGNP. In 1997, veryhard to finallyimplement. we advocategoing backin historyand 40 percentof sharesformally belonged ignoringthe free market'ssignals and to employees,18 percentformally be- ReputableRussian and Western econo- stockholders'individual profit motives as longedto top managers.The real distri- mists vehemently denounce the the focalindicators of the viabilityof en- bution is estimated at 20 percent communitarianvalues as old-fashioned,terprises. Institutions do, however,influ- employees,40 percenttop managers.) obsolete,and obstructiveto the trans- encethe incentivestructure of a society formation process of the Russian and, as a consequence,political and Sovietenterprise managers have tradi- economy.But their potencycannot be economicinstitutions are the underlying tionallybeen expected to givea highpri- ignored.Whenever understood, these determinantsof economicperformance. orityto thewell-being of all the members valuedo provideessential insights into Thusefforts to introducemarket-oriented of theirworkers' collectives, in termsof attitudesand practices by workers, man- managerialpractices in Russiawill fail, the basicsof life-housing, food, edu- agers, and enterprisesin present-day unlessthe traditionalmanagement sys- cation,medical care, job security,and Russia.It comesnaturally, to Russian tem is understood,and crucial elements benefits.These social expectations re- managersand workers alike, to identify of thethe RussianCommunitarian Value mainespecially strong today in hundreds with andpractice this value system and Systemare incorporatedinto Western of medium-sizetowns across Russia, to react negativelywhenever it is chal- managementmethods. whereeconomic life dependstotally on lenged.Acknowledging this can help The authoris VisitingProfessor at the the survivalof onlyone or two big local Westemmanagers devise ways in which AthensLaboratory of Businessadmin- enterprises.Workers in stateand priva- thesevalues can work for-not against- istration,Greece. te enterprisescontinue to look to their change.For example,structuring the top managers-notto their unionlead- managementsystem in sucha way that His original paper, 'Russian ers-as the protectors of their jobs. employeescan express their opinionon Communitarianism:An Invisible Fist in the Workers remainloyal to the old man- implementinga given business decision, TransformationProcess" (WorkingPa- agementby supportingit with the vote beforeit has beentaken. per no. 192,July 1992),was presented at of theirstock, in exchangefor beingkept the DavidsonInstitute Research Work- on the payroll,even part-time, and thus We do not claim that integrating shop,Organizational Change in Transition theycontinue to receivewhatever fringe communitarianvalues in the manage- Economies,Ann Arbor, Michigan, 1997. benefts,services, and care enterprises stillprovide to the membersof the work- ers' collectives. Workshop On Consumer Behavior

By ignoringthe codeof thetraditional n July 24-25 1998, 16 dis andcomplexity. Russell Belk of the Uni- valuesystem, Westemers often misun- tinguishedmarketing scholars versityof Utah discussedthe apparent derstandRussian managerial practices from aroundthe world met in anomalyof low-incomeconsumers in anddecisionmaking methods. Thus West- AnnArbor, Michigan to exchangeviews transitioneconomies spending money on em enterprisemanagers usually tend to on Marketing Issues in Transitional luxurygoods. He reminded the audience be "democratic"early on in the decision Economies,as part of a DavidsonInsti- that throughout history and across makingprocess of establishingtargets by tute researchworkshop. While several economies,luxury goods have always invitingtheir direct subordinates' opinions paperswere multicountrystudies, oth- been in demand.The reasonsfor this onwhat should be done, before establish- ersfocused on individual countries, such demaninclude their symbolicability to ingtargets, while Russian subordinates ex- as China,the Czech Republic, Hungary, satisfyconsumer's feelings of deserved- pect a goodleader to be 'centralist"by Republicof Korea,Poland, Romania, ness,their need to feel likea part of the establishingtargets alone. On the other Russia,and SouthAfrica. elite, and their desirefor respectability hand,if Westemmanagers, decide how and dignity. to implementa set target,without prior The paperspresented spanned five ma- consultationswith their subordinates, Rus- jor themes.The firsttheme was the way Jan-BenedictSteenkamp of the Catho- sians,according to theirtraiditional deci- in whichconsumers in these countries lic Universityof Leuven,Belgium, pre- sion-makingprocess, perceive it as were changing,as theirmarketing envi- sented data from South Africa that violatingtheir rights, to submittheir views ronmentsoffered them greater choice examinedthe waysin whichconsumer

* TRANSmION,October 1998 C) 1998The World Bank Presentations for ASSAs Annual Meeting. Duringthe forthcoming Annual Meeting of AlliedSocial Science Associations (January 1999) the following research fellows and facultyassociates of the WilliamDavidson Institute will presentpapers:

JosefC. Brada,Arizona State University, and Ali M. Kutan, JanSvejnar, University of Michiganand CERGE-EI and Frans SouthemIllinois University, Money, Employment, Output, Spinnewyn,Catholic University of Leuven,Unionized Firms and Regulation: EU Membershipfor TransitionEcono- in Transition Economies mies GerardRoland, Universite Libre de Bruxelles,Institutions, DanielMunich, CERGE-EI, Prague and Jan Svejnar,Univer- Law Enforcement,and Transition sity of Michiganand CERGE-EIand KatherineTerrell, Uni- versity of Michigan,Wage Determination Before and John P. Bonin, Wesleyan University and IstvanAbel, During the Transitionin the CzechRepublic BudapestUniversity and National Bank of Hungary,Restruc- turing in a Hurry: HungarianCompanies Attempt to Jan van Ours, Universityof Tilburgand MartinaLubyova, Maintain Market Share SlovakAcademy of Sciences,Active Labor Market Poli- cies and the TransitionRate from Unemploymentinto AnnetteN. Brown,Western Michigan University and J. David RegularJobs in Slovakia Brown,Stockholm Institute of TransitionEconomics, The Evolutionof MarketStructure in Russia: Implications Mark Foley,University of North Carolina,The Transition for the Emergenceof Competition from Work to Retirementunder EconomicUncertainty in Russia DanielBerkowitz, University of Pittsburghand DavidN. DeJong,Intemal Borders EnricoPerotti, University of Amsterdamand Stanislav Gelfer, RECEP,Investment and Financing in Russian Finan- SaulEstrin, London Business School, Privatization and cial-Industrial Groups Corporate Governancein Ukraine Anna Meyendorff,William Davidson Institute, Credit Allo- JohnEarle, Stanford University, Stockholm Institute of Tran- cation in Russia: The Role of Financial-Industrial sition Economies, The Political Economy of Mass Groups Privatization PhilippeAghion, University College London and Steven Fries, JanSvejnar, University of Michiganand CERGE-EI, Prague, EuropeanBank for Reconstructionand Development,Bank Currencyand FinancialCrises in Eastem Europeand Bailout Policy the Former Soviet Republics

'values priorities"differe by segment;the Chinaand their modes of resolvingdis- andreliable measurement of marketori- factors(such as genderand age)that agreements. entationamong firms in severalemerg- explainthese differences,and the con- ing and transition economies,while sequencesof thesedifferences on con- Threepapers focused on measuringand Patricia Huddlestonand Linda Good sumption behavior.(This paper was improvingthe extentto whichfirms in foundsimilarly satisfactory results in their coauthoredby StevenBurgess of the transitioneconomies possessed a mar- studyof retailfirms in Poland. Universityof Witswatersrandin South ketingorientation, necessary for survival Africa.)Segment differences were also and successin the more competitive Thethird theme was Branding Challenges the subjectof BemdSchmitt's paper on postliberalizationeconomies. Ron Savitt for local firms in transitioneconomies. consumersegments in China (Profes- of the Universityof Vermontreported on The defensiveperspective of ways in sor Schmittholds appointments at Co- hisstudy of 76 enterprisesin the Czech whichthey could fight global entrants into lumbiaUniversity in NewYork and at the Republic.His conclusionwas that not their local marketsgiven their own se- China Europe InternationalBusiness enoughprogress had been made,de- verelylimited resources, was discussed Schoolin Shanghai).David Tse and two spitea lot of lip serviceto the concept. by ErichJoachimsthaler of the Univer- coauthorsfrom the City Universityof Twoother papers in thisstream focused sityof Virginia,drawing from his research HongKong discussed research on gen- on measurementissues. John Farley of on Europeanfirms. Rajeev Batra of the erationaldifferences over family purchase Dartmouthand Rohit Deshpandeof Universityof Michigantook the offensive decisionsamong women in mainland Harvardreported success in the valid perspectiveand reported on his study of

© 1998 The World Bank TRANsmioN,October 1998 Fe brand-buildingchallenges faced by firms nizationand MrinalGhosh of the Univer- data comparng the market entry attrac- in the Republic of Korea as they tried to sity of Michigan presented exploratory tiveness of 18 Central and Eastem Eu- expand in Western markets. data from China on that country's con- ropean economies, while Yigang Pan tinuing problems with distribution ar- from the City Universityof Hong Kong Themefour was the evolutionof distribu- rangements, and how local companies reported on analysesfrom Chinashow- tion systems.Carmen Balan of theAcad- and multinationalcorporations were cop- ing that early entrantstended to do bet- emy of Sciencesin Bucharestpresented ing With them. ter, often using equity joint venture details of how the Romaniandistribution arrangements.Several collaborativere- system was evolvingand the challenges The Strategic Issues theme, included searchprojects are likelyto emergefrom that it still faced. Jim Gentry and Debra ways in which to choosewhich markets the conference,and an editedvolume of Dahabof the Universityof Nebraskadis- to enter and decisions on timing and the presented papers is planned. cussed the continuingimportance of re- modeof entry.Lalita and Ajay Manraiof lationshipsin the Hungariandistribution the Universityof Delaware(with Dana- Information: Professor Rajeev Batra. system. Louisa Ha of the Gallup Orga- NicoletaLascu of Richmond)presented Email: [email protected] Recent Papers of the William Davidson Institute

Copiesof the workingpapers are alsoavailable by contactingSharon Nakpairat, Research Manager, 701 TappanStreet, 9th Floor, Ann Arbor, Michigan 48109-1234, United States, tel. 313-763-5020, fax 313-763-5850,E-mail: [email protected];or davidson.institute@um. cc.umich.edu; Intemet: http://wwwwdi.bus.umich.edu. Following, is a list of someof the Institute'srecent working papers.

RobertA. Roe,Irina L. Zinovieva,Elizabeth Customer,or OutsideOwnership, WP 174, Evzen Kocenda,Accession and Real Ex- Dienes,and LaurensA. ten Horn,Firm own- June1998, 32 p. change Movements: A Comparison, WP ership and Work Motivation in Bulgaria 182,July 1998,16p. and Hungary: An Empirical Study of the John BenneKtand JamesMaw, Privatization Transitionin the Mid-1990s,WP 205, May and Market Structure in a Transition JanezPrasnikar and Jan Svejnar,Investment 1998,36 p. Economy,WP175, June 1998,37 p. and Wages during the Transition: Evi- dence from Slovene Firms, WP 184, July Irina L. Zinovieva,Why Do PeopleWork If Janos Vineze,Chronic Moderate Inflation 1998. TheyAre Not Paid?An Examplefrom East- in Transition:The Tale of Hungary,WP 176, ernEurope, WP 206,May 1998, 19 p. June 1998,29 p. Jozef Konings,Firm performance in Bul- DerekC. Jonesand Takao Kato, Chief Execu- GuidoFriebel, Bureaucracies in the Russian garia and Estonia,The Effectof Competi- tive Compensation During Early Transi- VoucherPrivatization, WP 177,June 199, 24p. tive Pressure, Financial Pressure and tion: FurtherEvidence from Bulgaria,WP Disorganization,WP 185,July 1998, 21 p. 146,June 5,1998, 2 1 p. Andrew Weiss and Georgiy Nikitin, Perfor- LaszloHalpern and GavorKorosi, Corporate manceof CzechCompanies by Ownership Lsl apr n ao ooi oprt RobertLetovsky, Reza Ramazani, and Debra Structure,WP 186,June 1998, 42 p. Structure and Performance in Hungary, Murphy, Environmental Protection and WP187,July1998,28p. Economic Development:The Case of the ChongenBai and YijiangWang, Investment HuaiheRiver Basin CleanupPlan, WP 147, Portfolio Under Soft Budget: Implications Daniel Berkowitz and David N. DeJong, June1998, 32 p. for Growth, Volatility and Savings, WP 183, Russia'sinternal Border,WP189, July1998, ZuzanaBrixiova and Wenli Li, Skill Acquisi- June1998, 9 p. 15 p. tion and PrivateFirm Creationin Transi- AnnetteN. Brownand J. DavidBrown, Does ArthurYeung and Kenneth De Woskin,From tion Economies,WP 162,June 1998,28 p. Market Structure Matter? New Evidence Survival to Success:The Joumey of Cor- Morris Bornstein,Framework issues in the from Russia,WP 188,June 1998. porate Transformation at Haier,WP 207, Privatization Strategies of the Czech Re- July 1998,40 p. public, Hungary,and Poland,WP 171,June DanielKaufmann and Dalia Mann,Disorgani- 1998,65 p. zation, Financial Squeeze,and Barter, WP MichaelD. Kennedy,A CulturalAnalysis of 165,July 1998, 23 p. Homosocial Reproduction and Contest- Chong-en Bai, Yu Pan, and YijangWang, ing Claims to Competencein Transitional lntragovernment Procurement of Local HaizhouHuang and ChenggangXu, Financing Firms, WP 208, July1998, 43 p. Public Good: Theory of Decentralization Mechanismsand R&D Investment,WP 180, in Nondemocratic Government, WP 173, July1998, 25 p. StevenM. Burgessand Jan-BenedictE. M. June1998, 24 p. Steenkamp,Value Priorities and Consumer LorandAmbrus-Lakatos and Ulrich Hege,Del- Behavior in a Transitional Economy:The PatrickBolton and ChengangXu, Ownership egationand Delayin Bank Privatization,WP Caseof SouthAfrica, WP 166 August1998, and managerial Competition: Employee, 181,July 1998, 30 p. 26 p. S

* TRANSITION,October 1998 C 1998The World Bank Rise and Fall of the Hainan Development Bank by Chi Fulin

T he HainanDevelopment Bank is Expansioncame easily at first.The bank lionrenminbi as well as bondissues and the first bank in Chinato close soon had offices in six mainlandcities shareholderfunds. downin 50years. It has attracted outsideHainan, including a full-service worldwideattention, especially because branchin southern Guangzhou and 3,000 The forced mergercame at the worst of Asia's severefinancial crisis. staff members.In 1996i madepretax time.The Asianfinancial crisis was be- profitsof 125million renminbi ($15 mil- ginningto releaseits sweepingforces. The FormativeYears lion) andboasted deposits of 4.1 billion Frighteneddepositors started to with- renminbi.Despite the expansion,the drawcash from thebanks. HDB not only BeforeHainan was declareda province bank'sloan qualityhas not been very failedto pullthe creditunions back from and grantedit specialeconomic zone good. The bank's1996 annualreport the brink,but with smallcash reserves, statusin April 1988,only two nonbank- acknowledgedthat some loanshad to it also sankinto a severepayment cri- ing financialinsttutions were operating be rescheduled. sis. Earlythis year HDBtried to float here, on China'ssouthernmost island. bondson the capital market-there were Bythe endof 1992,1,000 branch offices But it was a financial crisis involving nobuyers. In desperation the Hainan pro- of the 5 big commercialbanks, 24 trust Hainanprovince's 33 creditunions that vincialgovernment pumped millions of companies,and more than 30 urban pushedHDB overthe brink and closer renminbiinto the "bloodvessels" of the creditcooperatives, and several hundred to insolvency.As elsewherein China- bankand made frantic efforts to reclaim rural creditunions, foreign banks, insur- as pointedout by Bruce Gilley,Hong largeamounts of debt for HDB.It brought ancecompanies and securities agencies Kongcorrespondent for the Far Eastem more than 400 lawsuitsto the court. werelocated in Hainan-altogether 2,068 EconomicReview, in a recent article, Theselast-minute measures proved fu- financialinstitutions in a regionwith a tHtled"Breaking the Bank"-credit unions tile. By the time the closurewas finally populationof 7 million. took a lot of businessfrom banksbegin- announcedon June 21, no one in Haikou ningin the late 1980sby offeringbetter was surprised.HDB was put underthe In 1993 a numberof trust companies serviceand high (often illegally so) inter- trusteeshipof the Industrialand Com- cameclose to insolvency,along with the est rates for savers.In Hainancredit mercialBank of China,which has to pay drastic cooling of the once-booming unionssat on depositsworth 33 billion out both individualdeposit holders and propertymarket. Seekinga way out, renminbi,or 51 percentof all depositsin overseascreditors of thebankrupt HDB. Hainan's provincial government re- the provinceat the endof 1996. Negotiationsfor a final settlementwith questedand received the permissionof institutionaland enterprisedepositors, the Peoples'Bank of China(the central The Hainanprovincial government in- who providedthe bulk of HDB's re- bank)to establishthe HainanDevelop- structedthe Development Bank, with the sources,including the amountof inter- ment Bank(HDB) by mergingthe suc- approvalofthecentralbank,totakeoverest they should receive, are still cessful Hainan Funan Trust and 28 of the 33 credit unions.The others continuing. InvestmentCompany with four ailing trust were closed.The 28 creditunions cho- companies(Huaxia, Jiya, Shuxin,and sen had total assetsworth 13.7 billion Reasonsfor Collapse Zheqiong).In 1995,HDB started opera- renminbi(almost all loans)against total tionsas one of the first local commer- liabilitiesof 14.2 billionrenminbi. The In retrospect,several factors accounted cial banks,or, as the mediaput it, "one centralbank allocated 4 billionrenminbi for the closureof HDB: of the few purelyprofit-driven banks" in to cover the bad loans of the credit China.Its purposewas to financethe unions,or abouta thirdof thetotal loans. *The three-yearexistence of the Hainan developmentof the province.Hainan's But abouttwo-thirds of the loanswere DevelopmentBank (1995-98)coincided provincialgovernment put in 320 million nonperforming,leaving another 4 billion withthe lowestannual economic growth renminbiand becamea major stock- renminbishortfall on the Hainanbank's of the HainanSpecial Economic Zone in holder,holding a 30 percentstake. Alto- doorstep.Before the takeoverHDB's this decade.The provincebecame the gether,47 shareholdersbought up stocks books showed assets of 11 billion laggardon the national ratings list. While for a total equity value of 1.7 billion renminbi,about half of its loans.These the nationalsavings for the first half of reminbi. had beenfunded with depositsof 4 bil- thisyear-compared with the samepe-

© 1998 The WorldBank TRANSITION,October 1998 I riod last year-jumped by more than 15 taken over by HDB-were established OIn keen competitionwith other banks, percent, in Hainan savings nudged up- to finance investmentsin the fast-grow- HDB had to offer high interest rates and, ward by a mere 0.13 percent, and the ing (and later) "bust-going'property mar- hidden commissions to attract savings value of outstandingloans increasedby ket. "Oncethe propertyboom ended,the deposits. During its expansion drive it 0.39 percent-also compared to the accumulated problems of many years accumulateda large stock of bad loans same period last year.Local government burst into the open. Many financial insti- that eventually undermined its sol- officials,tend to blamethe closureof HDB tutions got caught up in the property vency. Even if HDB's performancehad onthe burstingof the 'bubble economy." craze in Hainan, resulting in illegal op- been better, insufficient capital and The bubble economy did play a role, erations and loss of control," according questionablefinancial assets of the 28 especiallyas most trust companiesand to the People's Daily. However,this is merged credit cooperatives eventually credit-cooperatives-either merged or only part of the story. would have shaken its financial posi-

TICs in China's Financial System

Whenstate-owned Guangzhou Shipyard Intemational parked been invested in real estate. "These TICs were born as a some of its cash in fixed deposits at a handful of China's kind of hidden reservefor provincialgovemments," adds an trust and investmentcorporations last year, little did it know official at a tic in one of China'sinland provinces."They were that it would have to sue to get it all back. Sincethe last of forced by local governments to make investmentsin local its deposits came due in July, $19.2 million remains out- projectsor give loans to local enterprises.They also lacked standing-about 10 percent of the company's net assets. self-disciplineand monitoringby the central bank." Guangzhou Shipyard blames the high-flying trust and in- vestment corporations,or "TICs," for bad investmentdeci- In addition to moving into riskier activities, most TICs have sions and poor management. increased their off-balance-sheet exposure, mostly in the form of loan guarantees.Some have createdhuge unhedged Tics are the most important of China's so-called nonbank foreign-exchangeexposures. And while much of their lend- financialinstitutions, which offeralternative financing and other ing is denominatedin foreign currencies, most of the bor- services that state banks can't provide. But most of the rowers have insignificantforeign exchangerevenues. country's243 TICs are faltering. (Of the total, roughly 100 hold licencesto raise capital overseas,these are the intema- For their part, GuangzhouShipyard and other state-owned tional TICs, or ITICs.) "Accordingto internationalstandards, companies listed on the Hong Kong stock exchange are the majority are bankrupt in terms of their operations and seekingredress through the courts. In July ZhenhaiRefining debt-to-equityratios," points out an executiveat a Zhejiang- & Chemical launched legal proceedingsagainst the China basedtic who declinedto be identified.The major barometer Orient Trust & Investment Corporation.in Beijing. When its is the impactthat collapsingTICs will haveon the state banks. $20 million deposit came due on July 1, it was told that the directorof the capital departmenthad "disappeared"and that TICs represent only 3.3 percent of all assets held by the a "criminal incident"was under investigation. country's financial institutions,but their failure would be a tremendous burden on the banks, which are unlikelyto be Accordingto Wang Songqi,vice directorof the FinanceResearch reimbursed for taking on the debts of these ailing institu- Centreat the ChineseAcademy of SocialSciences in Beijing,the tions. China's state banks are obliged to come to the res- solutionis to makeITICs and TICsprivate institutions in chargeof cue everytime nonbank financial intermediaries run into ther own lendingand investmentdecisions as wel as theirdebt. trouble. That, in turn, perpetuates a moral hazard, econo- "Thatwould avoid the currentsituation where once an ailing TIC is mists argue, encouragingrisky lending and investments. bankrupt,the buck is passedto anotherstate-owned financial instibutionor commercialbank," Songqi said. "But changingthat Problemsstarted to surfacein the 1990s when TICs reduced mindset is goingto take at leastfive years." their traditional lending and investment activities and in- creased their exposureto property developmentand stock Excerpted from Trish Saywell's recent article, Tic Fever: brokerage.Chen Yulu, a professor at Beijing's People'sUni- China's Shaky Trust and Investment Houses Start to Fall," versity, claims that about half of the TICs' total assets have Far Eastern Economic Review, October 22.

M TRANSITION,October 1998 C 1998 The World Bank tion. Surprisinglyenough, these prob- The central bank, through its local ing regionthat bordersHong Kong. Its lemsfor a long time haveescaped the branches,-shouldsupervise and regulate investmentsincluded the Guangzhou- attention of individuals and depart- local financialinstitutions and, at the Shantou railway, power plants in ments in charge. Some clients had same time if necessary,prevent local Dongguan,and the ShenzhenScience easy accessto multimillion-renminbi govemmentfrom interfering in the admin- and TechnologyPark. loans.For instance,a privatecompany istrativeaffairs of the local bank.In this in Hainan received a 1.35 billion respectwe should specifytwo major In recentyears its heavyexposure to renminbiloan from three credit coop- problems: real estatein southernChina went sour. eratives taken over by HDB. Soon GITIC's$2.4 billion in outstandingliabili- thereafter, the company applied for -The unequalrelationship between the ties have been transferred to the bankruptcy.Before HDB's closure, the centralbank's local branch and the local People'sBank of China,which prom- central bank shifted more than 3 bil- authorities.In mostcases, local branches ises to repay principaland interestin lion renminbias provisionalloans to of the centralbank can hardlyveto deci- full-but only on legal debts. The HDB,strictly for cashingin savingsde- sionsof thelocal government, some even People'sBank of Chinawas drawing up posits.However, the majorityof it was pursuethe local government's agenda. In newrules to standardizethe procedures misappropriatedfor other purposes. Hainansupervision and regulaton of HDB usedto closeGITIC. This chaoticsituation undoubtedly has by the centralbank's local branchhad beenassociated with corruptionof one beenrelatively weak throughout the now- Theauthor is executivedeputy directory kind or another. closedbank's three years of existence. of the Haikou-basedChina Institute for Reformand Development(CIRD), 57 Lessons Leamed -Local branchesof the centralbank RenminAve., Haikou, Hainan, 570208, lackthe resourcesfor effectiveprobing, China,tel. 86-898-625-8793,fax 86-898- Since 1997 China's central govern- monitoring,and supervisionof its op- 625-8777,E-mail: [email protected] ment-while acceleratingthe country's erations.At present,there are more financialsystem reform-consented to than 200,000 financial institutionsin and supportedthe locally established China that employ about 2.4 million A Hungarian Action-Thriller commercial banks. The sad fate of people,while the supervisoryand regu- HDB shows,however, that thingscan latory staff of the centralbank and its

go sour if a shareholder-be it a prin- branchesonly number 10,000. Thus al- -'

cipal investor,such as the local gov- thoughcentral bank branches at thepro- C - ernment-goes beyondits designated vinciallevel are authorizedto supervise N role and intervenesarbitrarily in impor- and regulatelocal financialinstitutions tant organizationalmatters and de- andreport to the mainoffice of the cen- cides-above the head of the bank's tral bank,the brancheslack the effec- management-whatprojects should be five means,staff, and equipmentto do

given loans. If they want to succeed in so. Much of the supervision is based > t _ market competition, banks need a on reportsof the financialinstitutions, - - governancestructure that corresponds some of which contain 'nicely pack- ;- to their joint stock companystatute. aged"information, playing down the dif- _ ficulties, rendering a problem-free, . HDBwas established by the patchingto- reassuringpicture. getherof assortedbanks, in orderto help the poorlyperforming ones. As the bank After closingdown the HDB, financial

startedto get out of difficulties,it hadto authoritiesrecently withdrew the oper- s - c "

take over 28 totteringcredit unions,and ating license of the Guangdong Inter- - . r r this sealedits fate. It was like rubbing national Trust & Investment salt in an open wound.Forcing viable Corporation.(GITIC), the nation'ssec- "Hang in there Oscar, soon banksto mergewith the weak orthe bank- ond-largesttrust and investmentcom- we will reach the tax free rupt canpush otherwise healthy financial pany. GITIC was set up in 1980 to zn institutionsinto bankruptcyand start an manage investments on behalf of zone. unwantedchain reaction. Guangdongprovince, the fast-develop- Fromthe Hungarianmagazine Hocipo.

© 1998 The WorldBank TRANSrrION,October 1998 U Defining the Post-Washington Consensus on Monetary Policy by Kurt Schuler

T wo articlesin the June 1998is- Goalsof monetarypolicy: On the do- throughinflation. Cutting deficits is thus sue of Transitiondiscussed the mesticside, inflationshould be in the a preconditionfor successfulmonetary emerging 'post-Washington low-to mid-singledigits. The central reform. There are many potential consensus"on economicpolicy recom- bank law shouldcontain a clear com- sourcesof deficits,such as bank bail- mendations,especially as it appliesto mitmentto maintaininglow inflationas outs,food subsidies, and grants to loss- formersocialist economies. Notably ab- the primarygoal of the centralbank. An making state enterprises.Each is a sentwas anyreexamination of monetary importantsecondary goal is to provide potentiala preconditionof monetaryre- policy.Since the Washingtonconsen- a safetynet for the financialsystem by form.To make the real exchangerate sus on monetarypolicy has neverbeen actingas a lenderof lastresort. On the competitive,a large initialdevaluation articulatedas John Williamsondid for internationalside, the real exchange rate generallyis necessary.Large subse- the overallWashington consensus some shouldnot divergetoo far from funda- quentdevaluations should be resisted, years ago, the first step in reexamina- mentalsby becominggreatly over- or even at the price of high real interest tion is articulation.Judging from the poli- undervalued;note that, unlikethe other rates,otherwise the centralbank will not cies that the Washingtoninstitutions goals,this rarely appearsexplicitly in achievecredibility. In the earlystages of (IMF,World Bank, Inter-American Devel- central bank laws. These goals may monetaryreform a lessflexible exchange opment Bank, U.S. Treasury, and conflictat times. rate may be appropriate;later, the rate USAID)have recommended overthe past canbecome more flexible. Large current- decade,the following propositions define Conduct of monetary policy: For accountdeficits signal that the currency theWashington consensus on monetary largercountries, the preferredtarget is maybe overvalued. policy. inflationrather than the exchangerate or somemeasure of the moneysupply, For countrieswith moderateinflation of, Role of monetarypolicy: An appro- but even for them the needs of ex- say, 6 percentto 20 percentor perhaps priatelymanaged monetary policy can change-ratemanagement may some- even40 percenta year,quickly reduc- offset financialshocks by providinga times trump the inflation target. For ing inflation to low single digits may safety net for the financial system. smaller countries, targeting the ex- cause an unnecessarilylarge loss of Sucha policycan also offsetsome un- changerate may be moretechnically outputin the shortterm. The higherthe favorablereal shocksby reducingthe feasiblethan targetinginflation. For all rate of inflation,the lower the loss of suddennesswith whichnominal prices but the smallestcountries, the current outputfromquickly reducing inflation. For needto change.Low inflation helps to consensus-unlikethe Bretton-Woods countriessuffering from hyperinflation, make long-runeconomic growth less era consensus-is that the exchange quickly reducinginflation often stimu- volatile. rate should be somewhat flexible, lates output. thoughnot necessarilya floatingrate. Monetaryauthority: In most indepen- Current-accountconvertibility should be The financialsystem: The main tool dent countriesthe monetaryauthority introducedquickly; capital-account con- for promotingsound banking is pruden- shouldbe a central bank with a high vertibilityis eventuallydesirable but not tial regulation.The threatof contagion degreeof independencefrom the restof immediatelyessential. from systemwidebank runs is highand the government,because that provides necessitatesa lender of last resort. the greatestpotential to managemon- Monetaryreform: Ordinarily (and the Openingthe financialsystem to exten- etarypolicy free of polificalinterference. Asian currencycrisis is an exception), siveforeign competton is desirable,but Centralbank independence is desirable countriesthat get into monetarytrouble not a highpriority. in developingcountries, even though re- generallydo so becausethey accumu- searchso far showsno clear link with lategovernment budget deficits or quasi- Likethe overallWashington consensus, inflation,as seemsto existfor industrial fiscal deficits,thus then pressuretheir theWashington consensus on monetary countries. central banks to finance the deficits policyis a series of measuresusually

* TRANSITION,October 1998 ©) 1998 The World Bank recommendedby Washingtoninstitu- it replacedthe Russianruble with its own cues suggeststhat closing banks is tionsrather than a listthey adhere to rig- currencyin 1992.Lithuania had a cur- moreefficient than rescuingthem. idly in all circumstances.But, in lightof rency-board-stylesystem from 1994to theactual performance of monetarypolicy 1997,and Bulgariahas had one since TheWashington institutions have spent informersocialisteconomies,it is strange 1997.Unlike the central banking systems large amountsof time, energy, and that no post-Washingtonconsensus has that precededthem, both Lithuaniaand money trying to improve monetary begunto emergeas it hasin privatization, Bulgariahave maintained stable exchange policy in former socialisteconomies. social services,and other areas. The rates.Latvia has a centralbank that holds Despiteit all, in most cases,monetary Asiancurrency crisis and its worldwide roughly100 percent foreign reserve back- policy in the recipient countrieshas effectsare makingpeople think more fa- ingfor the monetarybase and maintains been much worse than it would have vorablyabout capital controls. But per- a stableexchange rate with the special been by simplyimporting sound mon- manentcapital controls could fit intothe drawingrights (SDR). Slovakia inherited etary performancethrough currency consensuswith onlysmall modifications a traditionof relativelytight monetary boardsor dollarization,and importing a of the otherelements. After all, Keynes policyfrom the CzechoslovakCentral good bankingsystem by allowingthe favoredpermanent capital controls, and bank,which it has continued. world's leadingbanks to buy or com- theIMF Articles of Agreement are worded petefreely with domesticbanks. To me, to allowthem. Monetarypolicy in otherformer social- this suggeststhat a post-Washington ist economieshas rangedfrom mildly consensuson monetary policy in former Almost all former socialisteconomies disappointing (Czech Republic) to socialisteconomies and otherdevelop- have been receivingaid or adviceon wretched(Belarus, Ukraine). Even those ing countriesshould contain the follow- monetarypolicy from the Washington countrieshailed a fewyears ago for hav- ing propositions: institutionsfor at leastfive years.Many ing stabilizedtheir currencies,such as countrieshave not followedthe advice the CzechRepublic and Russia,have Role of monetary policy: A managed consistently,but that in itself is telling. since experiencedcurrency crises that monetarypolicy is moreoften a cause As an indicationof the effectivenessof have requiredeither devaluation or ex- of shocks than a buffer,especially in advicefrom Washington,consider the tensiveforeign aid. former socialisteconomies and other changein exchangerates during the past developingcountries. At leastfor such fiveyears againstthe U.S. dollar, orwhat- The wideuse of the U.S. dollarand the countries,the most appropriatemon- everother currency is usedas the an- Germanmark as stores of value and etary policyis a completelyautomatic chor.I haveselected a periodof five years mediaof exchangein most formerso- onethat leavesno room for localman- becauseby mid-1993the formersocial- cialist economiesis anotherindication agement. ist economieshad enoughtime to re- of poor monetarypolicy. The value of solvethe exchange-rateproblems they trade in dollars purely within Russia Monetaryauthority: The monetaryau- inheritedfrom socialism.Since then, was estimatedto be twicethe valueof thorityshould be an orthodoxcurrency their problemshave beenof their own trade in rubles even beforethe latest boardor, as in the caseof a dollarized making.Besides the exchangerate, one ruble crisis. system,no monetaryauthority at all. could look at inflation rates, interest rates,or convertibility,but they would tell In thewide sense,monetary policy also Goals of monetary policy: Monetary a similarstory. The exchangerate is a includesbank regulation. In mostformer policy should have only one goal: to goodshorthand view of the overallper- socialisteconomies the bankingsystem maintainfull convertibility at a trulyfixed formanceof monetarypolicy. remainsfragile and rather backward. exchangerate with a soundmajor cur- Governmentsrestrictforeign competition rency,generally the U.S. dollaror Ger- 4 The onlyformer socialist economies that to protectmarket share for locallyowned man mark. have maintainedstable exchange rates banks.By doingso, however,they slow duringthe past five years are Bosnia, the paceof innovationand deny deposi- Conduct of monetary policy: A truly t Estonia,Latvia, and Slovakia.Bosnia tors the stabilitythat bankswith inter- fixedexchange rate providedby a cur- hasmaintained a fixedexchange rate to nationalbranches offer. Governments rency boardor dollarizationis sustain- the Germanmark, and has recentlyso- havechosen to rescuerather than close ableindefinitely. The automatic character lidifiedthe rate by establishinga cur- manyinsolvent banks. Though there has of monetarypolicy means that inflation, rency-board-stylesystem. Estonia has beenno systematicstudy on the ques- interestrates, the real exchangerate, hada currency-board-stylesystem since tion, the high cost of many bank res- and so on are determinedby market

© 1998 The WorldBank TRANSITION,October 1998 * forces throughinternational arbitrage CEEC ut d th Ye r 2000 withoutcentralized monetary manage- Ustoms an e ea ment.The currency should be madefully f convertible immediately. Bug- Ready for

Monetary reform: Generally,central the M lllennium? W bankingrather than bad fiscal policy is what gets countriesinto monetary by Peter Davies trouble.Currency boards or dollarized systems cannot finance fiscal or quasi-fiscaldeficits, so they tend to nrecent issues of Transition,we high- technologysystems vary. They perform force fiscal reform, ratherthan requir- lighteda numberof problemsthat varioustasks without the abilityto share ing it as a preconditionfor successful businessesface in tryingto get con- or transmitdata. In some countries DHL monetaryreform. A largeinitial devalu- signmentsthrough customs in Central is oftenasked to manuallyduplicate the ation of the exchangerate may not al- and EasternEurope: lack of adequate electronicclearance process by produc- ways be necessary.There shouldbe communicationbetween customs ad- ing hard copydeclarations. This brings no attemptto defendthe currencywith ministrationand the businessworld, little benefitto eitherthe customsau- high interestrates; internationalarbi- sometimesoverly rigid interpretationof thoritiesinvolved or to companiessuch tragewill tend to pushrates toward the the rules,a shortageof resources,and as oursthat clearthe goods. levelsof the anchorcurrency. Under relatedto this,a lackof informabontech- currencyboards or dollarization,large nologysystems capable of matchingthe Earlierthis year The GartnerGroup sur- current-accountdeficits are perfectly needsof businesses.The challenge cus- veyedcountries around the world to as- acceptableand do not signalpossible toms authoritiesface is not onlyto up- sess their computerpreparedness for overvaluationrelative to the anchorcur- gradeinformation technology systems, the millennium. The survey graded rency. buttoprepare forthe "millennium" or "year countriesfrom 0 (no actiontaken at all) 2000"(Y2K) bug. to 5 (completionof work on all sys- Evenin countrieswith moderateinfla- tems). The Centraland EasternEuro- tion theremay be no loss of outputin Thestatus of customsinformation tech- peanstates and Russia were assessed the short term from establishingcur- nologycapabilities around Central and at level1 (basicrecognition of theprob- rency boards or dollarizationquickly, Eastern Europe and the CIS is very lem andthe needfor action),while most because they have more credibility mixed.Some countries have developed of the CIS,outside of Russia,were as- than central bankingin guaranteeing fullyintegrated systems and allow elec- sessedat 0. low inflation. tronicdata exchange. Others have ab- solutelyno automationat all.Everything One reasonfor the lack of actionso far The financial system:A lenderof last is donemanually, which makes the cus- is, of course,cost. InAugust, Alexander resort creates more problemsthan it toms clearanceprocess very time-con- Krupnov,chairman of the Russianstate solves.Closing insolvent banks is pref- sumingand costly.(At the same time, communicationscommission, estimated erable to rescuingthem with govem- these are the customsoffices that are that it couldcost Russia $500 million to ment funds. The financial system notworried about "year 00"). fix the problem.Another reason for lack shouldbe fully opento foreigncompe- of actionis simplya perceptionthat the tition; "internationalization"makes the However,very few countrieshave in- problemwill go away[This attitude is not financial system more robust and is vestedsufficiently in customsinforma- restrictedto Transitioncountries, see moreeffective than prudential supervi- tion technology. Many customs box.The editor.] sion at improvingthe average quality declarationsystems have been devel- of domesticallyowned banks. opedwith little regardfor businessre- AlthoughDHL is investing$25 millionto quirementsand futureneeds of the EU makesure its systemsare Y2K-compli- Kurt Schuler,a monetaryconsultant, accession, the Y2K problem, and ant, it is vital that the systemsused by is the author of Should Developing changesin computertechnology, includ- customsauthorities are ableto function CountriesHave Centralbanks? (Lon- ing new computerlanguages. As a re- comeJanuary 1, 2000(or earlier,in the don: Institute of Economic Affairs, sult, in most Central and Eastern case of systemsthat forecastmonths 1996). Europeancounbies customs information ahead).If timelysolubons aren't found,

* TRANSITION,October 1998 © 1998 The World Bank the implicationsto the economiesof the EuropeanCommission to deliver internationalcodes and standardsrel- Centraland EastemEurope, are enor- electroniccustoms declarabon systems evantto customsprocessing as estab- mous. BusinessWeek has estmated that are Y2K-compliant,as detailedin lished by International Standards thatthe Y2K problemwill cut half a per- their Blueprintfor Accessiondocument Organization(ISO), the WorldCustoms centagepoint offtheir growth in 2000 and (seeTransition, June 1998). Funding has Organizabon,and the UnitedNabons. It 2001. beenprovided via the PHAREprogram, canbe configuredto suitindividual cus- with mixedresults. toms regimes,national tariffs and cus- What is being done to help customs toms regulations,and legislation.The authoritiesin Centraland EastemEu- TheUnited Natons Conference for Trade expressindustry offered UNCTADits rope developinformation systems that andDevelopment (UNCTAD) worked out help to accelerate applicationof the both can meetthe needsof foreignin- a program-AutomatedSystem for Cus- package.Nevertheless, uptake has been vestorsand avoidany year 2000prob- toms Data (Ayscuda)-to computerize slow so far, althoughcustoms authori- lems? Countrieswishing to join the and simplifythe customsprocess. The tieswill havebetter opportunities to con- EuropeanUnion are under pressure from Ayscudasystem takes into accountall trol exchange and commodity duty

Terminating the Y2K Computer Bug in Transition Economies

The centurydate conversionis at leasta trillion-dollarprob- networks,the BIOSin PCs,and eventhe date-drivenchips lem, but it couldalso be the tip of a computerizediceberg, that compriseembedded systems. with enoughforce to rattlebusinesses worldwide. What'sit all goingto cost?Some estimates put $600billion Becauseof the high costof memoryand diskspace in the worldwideas the cost of repairing applications,networks, earlydays of computing,programmers adopted a standardof embeddedsystems, and so on. Whilethe costof repairswill using2 digits(98) to representfour digits (1998) in datefields. be high,perhaps the mostalarming threat is thecost of lifiga- Thisstandard is stillin usein manycomputer programs today. tion. The AmericanBar Association has projectedan addi- As weapproach 2000, computers will fail when they attempt to tonal $700billion for lifigafionassociated with the year2000 performcomparisons or arithmeticoperations that use 00 as a problem.These lawsuits will befiled by clients whose finances representationof the 2000 digit.This maycause unreliable or investmentshave been damaged,and by shareholders resultsin programsor outrightfailure of thecomputer systems. whosecompanies suffer from not makingthe transition.

Most businesssystems are time sensitive,which means The currentstate of readinessis troublesome.Anywhere that an estimated85 percentof all programsmay be af- from 40 to 60 percentof all U.S. companieshave yet to fected.Currently, there are approximately500 computer lan- begin addressingthe problem.That's a startlingstatistic, guagesin usethroughout the world with the cost of identifying but onedwarfed by surveyscoming out of Europeand Asia and repairingthe problemspecific to eachlanguage. CO- wherethe centurydate conversion has barely registered on BOL, whichrepresents the largestinstalled base, is sup- thespreadsheets of countriesdealing with challenges rang- portedby a rangeof automatedyear 2000tools. Similar ing from monetaryunion to economiccollapse. solutionsexist for RPG,Fortran, PUl, Focusand Natural. The mostdifficult common language to repairis C. TheWorld Bank realized that there is a problemat hand.Its Informationfor Development(info Dev) is providinggrants to Butthat is justthe tip of the iceberg.Because we live in an transitioneconomies, to addressthe problem,on a first- increasinglynetworked world, most systemsexchange data come-firstserve basis. The grantcan rangefrom $100,000 with a varietyof externalentities, such as stateand federal (forthe development of nationalplans) to $500,000(for imple- agenciesas well as tradingpartners, using electronic data mentationof the Y2K adjustment).(See also the Bank's to transferinvoices and purchase orders. If theseorganiza- Website: http.-:/Awwwworldbankorg/y2k.) tionsare not compliant, their data can act like a virus,spread- ing faultyinformation to interfacingfiles anddatabases. As (Contributionsof RobertK S. Hogefrom the WoridBank's for hardware,the problemspans not only the mainframeand InformationSolution Groupand Miroslav Frick from the midrangeworlds but alsothe servers,hubs, and routersin BudapestRegional Office, are appreciated.)

© 1998 The World Bank TRANsrTON,October 1998 U rates, and offer automatedclearance. Frequentlyauthorities adopt only se- Readers Forum lectedcomponents of the UNCTADpro- gram,reducing it to little morethan an The Crisis and Its Roots-Ruble Collapse electronictypewriter. Revisited

DHLis readyto provideassistance. The by Evan Scott statecustoms office at the Warsawair- port, for example,(together with our ncreasingly,the InternationalMon- 20 untilthe ruble'scollapse, the central company)is testingnew softwarethat etaryFund (IME) seems to be target bankhad actually spent up to $3.8billion will speed up the customsclearance ing structural adjustment criteria to defendthe currency,while the Finance processconsiderably. Once this sys- rather than stabilizationcriteria. This Ministryhad used $1 billionto redeem tem goes "live" later this year, DHL's seemedto be thecase in Indonesia,for short-termgovernment debt. What this customsagents will be able to trans- example,where the IMF programap- meansis that the IMF loanwas effec- fer all shipmentdata to the customs pearedto targetthe corruptdealings of tivelyexpended in a fortnight,as the Rus- officewith a simpleclick of the mouse the Suhartoregime by advocatingin- sians tried to prop up the ruble by (a similarsystem already exists in the creasedtransparency in government spendingmore than $1 billiona week. But CzechRepublic). The customsofficer contracting.Yet experts in thisfield tend there'smore. FormerDeputy Prime Min- will be able to processthe documen- to agreethat establishinga Western- ister Nemtsovalleged that duringthis tation and send it back to DHL with stylerule of law in Indonesiacould take periodhe triedto get the primeminister anotherclick, a generationor more. Howthen, could to considera devaluation,only to be told thesestructural adjustments have been thatthiswasimpossible.Why?"Because The expressdelivery industry has many consideredeffective for aneconomic sta- the IMF opposedit," saidKiryenko, ac- yearsof practicalexperience in the de- bilizationprogram? cordingto Nemtsov,who revealedthis, velopmentof automatedcustoms dec- after PresidentYeltsin fired the entire larationsystems throughout the world. The lessonof the debaclethat followed government. Customsauthorities should be encour- in Indonesiacould be that instruments agedto workin partnershipwith the in- must be matchedto objectives,includ- Howcould this debacle happen? Indeed, dustry to implement state-of-the-art ing the time frameenvisioned for the why was the IMF tryingto propup the systemsthat are capableof handling objectivesto be achieved.Unfortunately, ruble instead of quietly counselinga businessesneeds. Besides,the Y2K this lessonhad not beenabsorbed by moreflexible exchange rate policy? It problem has seriousimplications and IMF staff by the time the last IMF loan wasn'tas if therehad not been warnings customsauthorities are urgedto act now to Russiawas approvedlast summer. thatthis policywas follyon an immense if they havenot already. The recordof the Russiandebacle is as scale. In fact, my ownarticle in theAu- follows. gustissue of Transition,"Who Believes Theauthor is DHL'sdirector for Central theRuble Will NotBe Devalued?" argued and EastemEurope and the CIS. In the first two weeksof August1998 it the following:Why have officials of inter- was alreadyclear that Russiancentral nationalinstitutions and Western govern- DHLis boththe leading air expresscar- bankingauthorities could not preventa mentstied the future of reformin Russia rier in the CISand the largestimporter collapseof the ruble.And this was just to an overvaluedexchange rate? Trying (measuredin transactions)into Central weeksinto a $4.8 billionIMF program, to maintainan artificiallyhigh exchange andEastem Europe as a whole.DHL is part of a $22.6billion package of loans rate will only depletethe country'sre- interestedin hearingany comments from whose main goal was to supportthe mainingforeign reserves, use up itslines Transitionreaders about customs pro- ruble,come what may. On August17 of creditto internationalfinancial institu- ceduresin the transition economies. the Russiangovernment devalued the tions,and forceit to stiflerecovery with Please contact Dirk Singer, E-mail: rubleand, in a potentiallymore damag- an exorbitantinterest rate. dirks@redconsultancycom,tel. 44-171- ingmove, mandated a generaldefault on 465-7700. Russiandebt. The antecedentsto the ruble debacle, also coveredin that article, are well The centralbank Governor at the time, known. Russiahad achieveda kindof SergeiDubinin, disclosed that from July stabilityon the back of its oil exports,

M TRANSImON,October 1998 © 1998The World Bank whichit ublized,in combinabonwith the to achievetax reformover the opposition ity hadcounseled from the beginning that nonpaymentof govemmentwages and of thecommunist-dominated Duma, and proppingup the rublewould not fly, and pensions,to compensatefor its failure that achievinga timelyoutcome of this the$23 billion IMF-backed financial pack- to collecttaxes. But whenthe price of longstandingstruggle was inherently out- age ought to be used to bridge the oil fell by half, its oil incomedropped. sidethe control of centralbanking authori- govemment'sdebt-payment obligations in tiesresponsible for maintainingthe value theshort-term until those obligations could Whenan unforeseenbut apparently per- of the ruble. How muchbetter it would be restructured. manentnational income shock like this have beenif the IMF and the Western occursthe prudentresponse is to reduce govemmentofficials who were interested The authoris an internationaleconomist, the price of one'sexports and increase in maintainingRussian economic stabil- based in Washington,D.C. the price of importsto regainstability. Theway to do thisis to let the currency depreciate,withstand the upward adjust- ment of import prices that willfollow by Institutdons Count More than standingfast againstincreased wage demandsand pleasfor moresubsidies, Liberalization Speed andjust rideit out. by Vladimir Popov

In fact, this responseis what the text- bookIMF approachwould indicate. IMF The conventionalwisdom suggests whilein the Balticsoutput fell in theearly loans are supposedto help a country that differencesin economicper- I 990sby 36-60 percent and even in 1996, ride outthe stabilizationperiod by pro- formanceare associatedmostly two yearsafter the bottomof the reces- vidingthe foreignexchange it needsfor with'good andbad" policies-in particu- sionwas reached,it wasstill 31-58per- essentialimports until the depreciation lar,with the progress in liberalizationand centbelow the prerecessionmaximum. causesexports to pick up. It is true that macroeconomicstabilization: Countries a depreciationmakes it harderfor the thatare moresuccessful than othersin Overall,attempts to link differencesin countryto repay its foreignloans until introducingmarket reforms and bringing outputchanges during transition to the its exportshave recovered. Butthat is downinflation are believed to havebetter cumulativeliberalization index and to also what IMF loansare supposedto chancesto limit the reductionof output macro stabilization(rates of inflation) helpwith, by providingshort-term liquid- andto quicklyrecover from the transfor- havenot yielded any impressive results. ity to financethe increasedcost of ser- mationalrecession. In generalthis may Declinein outputis a supply-sidephe- vicingforeign debts until export revenues wellbe true, but the devil is in the details, nomenonand is the result of a struc- pick up. whichoften do notfit intothe generaliza- tural adjustmentprocess that rectifies tionand make the whole explanation look distortions of the centrally planned Instead,somehow IMF staff were per- trivial.In Russia,despite the high degree economy,including restructuring an ob- suadedto tie short-termstabilization of liberalizabonand threeyears of mac- solete militarizedindustry, strengthen- goals to commitmentsto implement roeconomicstability (until the August cr- ing the weak service sector, and medium-termstructural adjustment mea- sis),the economic performance was poor developinga healthytrade pattem. sures. With oil andgas revenueshav- and endedup in a spectacularcrash. ing severely declined, and with the Thedecline of noncompetitveenterprises govemmenthaving already borrowed well The championsof liberalizationand sta- and industriesis not followedinstantly beyondits capacity,immediate reform bilizationin the EastemEurope-Central by an expansionof competitiveindus- of the tax system,including reform of Asia regionare the Balticstates (their tries and enterprises,due to barriersto the tax collectioninstitutions, became so-calledABRADE cumulative liberaliza- capital and labor flows, includingthe a prerequisitefor the success of the IMF- tion index reached2.4-2.9 by 1995), poorlydeveloped banking systems and supportedstabilization program. whereasUzbekistan (with an index of 1.1) securitiesmarkets, uncertain property commonlyis perceivedto be oneof the rights,the lack of easilyenforceable and Considera scenarioin whicha succes- worst procrastinators. However, in commonlyaccepted bankruptcy and liq- sion of Russianprime ministers, dating Uzbekistanthe reductionof output in uidationprocedures, the underdevelop- back to the earliestdays followingthe 1990-95totaled only 18 percentand the mentof landmarkets, housing markets, collapseof the SovietUnion, had failed economystarted to growagain in 1996, and labormarket infrastructure.

( 1998 The World Bank TRANSInON,October 1998 * While initial conditionsare important, much on the progressin liberalization TransitionEconomies: Factors of Change governmentpolicy does affect perfor- per se. andImplication for Performance,"Jour- mance.Policy measures are requiredto nal of East-WestBusiness and 'Willthe preserveor createstrong and efficient Theauthor is atthe Academy of National RussianEconomy Get on a FastGrowth institutionsthat facilitate the market Economyin Moscowand is a visiting Track,"Communist Economies & Eco- economy.In mostCIS and Balkan coun- professorat Queen'sUniversity, Canada. nomic Transformation,E-mail address: tries the collapseof institutionsis ap- His forthcomingarticles: 'Investment in popovv,qsilver.queensu.ca parentin the dramaticexpansion of the shadoweconomy; the decline of govern- mentrevenues as a proportionof GDP; Causes and Lessons of the Stodk Market Crsis the inabilityof the state to deliverbasic publicgoods and appropriateregulatory by Sandor Kopitsy and Gyorgy Matolcsy framework;the accumulationof tax, trade,wage, and bankarrears; the de- he presentstock-market crisis matically.The public in the industrial monetization, 'dollarization," and was caused primarily by countriesholds about two to threetimes "barterization,"of the economy;and the themonetary surplus that has ac- as muchsavings in stocksas 10 years declineof bankfinancing as a propor- cumulatedin the globaleconomy. The ago. tion of GDP. It is also demonstrated supplyof investmentfunds significantly * Compliancewith the Maastrichtcri- throughthe poorenforcement of prop- exceedsopportunities to invest,in other teria andthe Brusselsdecision to intro- erty rights,the disregardof contractual words,monetary supply is greaterthan ducethe europropelled governments in obligations,the generalbreakdown of effectiveinvestment demand. The follow- the EuropeanUnion to reducebudget lawand order and increased crime rates. ingare someof the reasonsthat explain deficits.As a result,the emissionof gov- this trend: ernmentsecurities was cut back, and Accordingto a recentlyconducted glo- o Therate of profitsin thereal economy the money,spent earlier on govemment bal surveythat questionedfirms in 69 in the past two decadeshas beencon- securities,was now flowing onto the countriesabout their trust in state insti- tinuouslylower than the interest rate and stock exchange. tutions,firms in the CommonwealthOf returnson securities'investment. This * Publiccompanies have repurchased IndependentStates (CIS) had the low- trend has been unprecedentedin 200 an annual $200 billion of their own est credibility,below that of Sub-Saharan years of economichistory, at least in stocks.During an across-the-board mar- Africa(1997 World Development Report, peacetime.Consequently, profit accu- ket upsurge,this provedto be a good The Statein A ChangingWorld). Espe- mulatedin the realeconomy has drifted investment.Also, stock-buyingoptions ciallystriking was the gapbetween Cen- into the financialsector. have been playingan increasinglyim- tral and EasternEurope and the CIS. o Economicpolicies, driven bythe neo- portant role in compensatingthe top classicalliberal theory, accelerated the managers,so they becameeven more Theshare of staterevenues in GDPcan devaluationof the real economy compared motivatedto maintainor increasethe well indicatethe institutionalcapacity of with the financialsector. By the 1980s, valueof their ownstocks. the state-the financialstrength of the monetaristeconomic policies had be- govemment.Though much has been said comepredominant in developedmarket The neoclassicaleconomic theory con- about 'big government"and too high economies.These policies declared in- sidersonly price increases in the goods taxesin former socialistcountries, by flationpublic enemy number one, and marketas inflation.A steep increaseif now it is rather obvious that the condonedfinancing of the budgetdeficit shareprices is not considereda harm- downsizingof the govemmentthat oc- throughfinancial market instruments. ful trendthat needs countermeasures. curredin mostCIS statesduring transi- Slower inflationbrought interest rates And whilestock prices often jumped by tion led to the collapse of the state downand lifted stock prices. 20-40percent annually in the past two institutions. * A risein stockprices has attracted decades,especially in recentyears, the investors.Investing in sharesproved to annualinflation in the goodsmarket has Thereis enoughevidence to showthat be moreprofitable than keeping savings remainedat 2-3 percent.Money, though differingperformances during transiton, in banks,holding government securities, a particularcommodity with a particu- after factoringin initial conditionsand or puttingmoney in businesses.Both lar market,is still a commodityand its externalenvironment, mostly depend on the numberof investorsand the amount price still movesaccording to the mar- the strengthof institutionsand not so investedon the stock exchange rose dra- ket lawswhere supply and demand de-

* TRANSITION,October 1998 C) 1998The World Bank termine prices. The two-digit inflation can be created.This economicpolicy The authors are Hungarian econo- that hasbecame a permanentphenom- also increases domesticpurchasing mists; Mr. Matolcsyis director of the enonin the capitalmarket, meant that powerthrough higher income and con- Economic Growth Institute, E-mail: stock prices have risen disproportion- sumptionby expandingthe workforce [email protected] ately,compared with both the pricelevel whichcreates a higheradded value. of other commoditiesand the rise in profits.In the capitalmarket, demand has been significantiy larger than sup- Virtual Knowledge about Russia's Virtual ply. From anotherangle: the supplyof Economy investment money considerably ex- ceededthe supply'of desired,accept- by Stanislav Menshikov able investmentopportunities (that is, investmentdemand). wonderwhether Ickes and Gaddy Probablynot. In a deepcontracton (Rus- (Underneaththe FormalEconomy- sia lost half of its GDPin 1991-97,the The presentstock market crisis is differ- WhyAre Russian Enterprises not Re- UnitedStates lost more than 30 percent entfromtheoneduringtheGreatDepres-structuring,? Transition, August 1998, in 1929-33) widespreadlosses are to sionbetween 1929 and 1933. Back then, p.1.) have ever seen a Russianinput- be expected.Yet, the same industries the snowballwas set in motionby the outputtable?The latest one available for tend to recoverand showlarge profits bankruptcyof Austria's Creditanstalt 1995 showsthat therewere onlyfour when deflationary gaps are closed. bank.It gained impetus afterward through industriesin Russiathat were net sub- Economists,in the 1930swould have the crash of the New York Stock Ex- sidyreceivers: coal, agriculture, commu- advisedthat scrapping most U.S. indus- change,and then spread almost instantly nal services, and science. All other trieswould have been gravely wrong, to to theintemational financial markets. The industrieswere value creators under any put it mildly.Yet, makingsimilar claims situationof the 1990sis no lessthreat- validdefinition of the term,whether it is vis-a-vis Russia today makes such eningand the riskof a financialcrisis is grossvalue added to material(interme- economistsfamous and eagerlypub- no lessserious than it wasat the endof diate)inputs or in themore narrow sense lishedin leadingU.S. newspapers.The the 1920s.There are, however,several of coveringlabor costs, too. doublestandard persists. mitigatingfactors: *The intematonalfinancial system has This major statisticalevidence is sup- Ickesclaims: 'The wholepoint about the learnedits lessonfrom the greatdepres- portedby nationalaccounts statistics, virtualeconomy is that if goodsare not sion also availablefor 1996when profts in exchanged at their true opportunity _Theindustrial economies are stable Russiadeteriorated sharply. Even then, costs,we simply do not know which firms *Theglobal information economy is more practicallyall branchesof the economy are profitableand whichare not, and layeredalong center and peripherylines remainedvalue creators, not valuede- whichare valuecreating and which are thanwastheworld economy inthe 1930s, stroyers.To Russianeconomists with a not."But if that is true with respectto thusthe crisiscan be isolatedin time. first-handknowledge of facts and figures, the Russianeconomy, his andGaddy's claimsabout value destruction as a gen- theoriesabout the 'virtual economy" sim- The lurking financial crisis could be eral rule in Russiaseem at best a wild plyhave no logical foundation. When no checked by strengthening the real fantasy. one (includingthemselves) knows what economy.If profitexpectations improve, true opportunitycosts are, how can any- moneywill flow from the stock market The Russiansituaton is very similarto one seriouslytheorize about value de- to manufacturingand services. This pro- that of the U.S. economyin the Great structionin Russia? cess can be acceleratedthrough the Depressionof the 1930s.A lookat His- encouragementand extensionof re- torical Statistics(a classic statistical As a rule, in real life most firms in the search and development,innovation, referencesource for thatperiod and ear- West(as in Russia)measure their costs trainingand other intellectual-cultural in- lier times)shows that grossvalue added and pricesirrespective of true opportu- vestments. In the 'Visegrad econo- fell drasticallyin all industries,while quite nity costs(which are difficultand costly mies," if intellectual capital can be a few showeda net loss (ratherthan to calculateanyway), because profits made availableto businessesthat are profit) industrywide.Would Ickes and based on marketprices (which do not listedon the stockexchange, real foun- Gaddyclaim that the U.S. economy was necessarilyrepresent true opportunity dationsfor higherstock marketprices a major value destroyerat the time? costs,either) are whatcount with share-

© 1998 The World Bank TRANsrroN,October 1998 x holdersand the stock market,not the is animportant indicator for guidingcor- (togetherwith the IMF)have practically abstractopportunity cost concept. porate decisions, its permanentzig- ignoredthe issue.The Primakovgovem- zags in market values and company mentshows signs of recognizingthe im- Of course, all business executives, capitalization,with verylittle directcon- portance of these issues. I have to whetherin the west or in Russia,in- nectionto real value, make it no less concludethat, with all duerespect, Ickes's stinctivelyfollow the rule of minimizing 'virtual' than Russia'spredominantly andGaddy's concepts on valuedestruc- potentiallosses, which lies at the heart barter economy. ton havelittle relation to Russianrealities. of the opportunitycost concept.But in its pureform the ruleof minimizingpo- Thatis notto saythat barter is admirable. The authoris sectionhead at the Cen- tentiallosses is goodfor the classroom, Of course,it is not. Butunless the bank- tral Instituteof MathematicalEconom- not for the corporationboardroom or for ing system in Russiais thoroughlyre- ics (CEMI),Russia, and a research fellow the floor of the New York Stock Ex- formed,barter and interenterprise arrears resident in Rotterdam,Netherlands. change.As for the stock market,which areunavoidable. The previous governments Email: [email protected]

Response to Menshikov-The Causes of Crisis by Barry W Ickes

T he statisticsthat have beenof- engineer;I certainly will avoid his bridges. ducersthat cannotcompete in an open feredto 'prove"that [Russian] en- I don'tsee why this logic is anymore sat- economy.Without protection,Russia terprisesare not value destroy- isfactoryfor studyingeconomics. exportscommodities and importscon- ers are uninformativeunless we know sumptiongoods. Menshikov sees an in- the actualprices at whichtransactions Menshikov'sargument seems to be that creasein nominalspending leading to are made.When transactionsare re- measuringvalue added at worldprices an increasein outputas consumersbuy portedin rublevalues but paid for with is of no relevance.He is correctto state the outputof Russianindustry. I see an instrumentsthat trade at a discount,the that no matterhow inefficient is manu- increasein nominalspending leading resultingfigures cannot demonstrate facturing,Russia must have a compara- to increasedpurchases of importsand whatpeople are claiming they do. I have tive advantagein some activity.But in a resurgenceof inflation. Menshikov arguedthat you cannotsimply add the thatcase Russia' comparative advantage sees an increasein creditsto thesein- ruble valuesof transactionsthat take maynot be in manufacturing.If Russian dustriesleading to a revivalof produc- placewith instrumentsthat tradeat dif- manufacturinguses energyless effi- tion. I see an increasein creditto these ferent discounts to each other. ciently than foreigners do, then the industriesleading to moreunusable pro- Menshikovapparently disagrees. theoryof comparativeadvantage says it duction.The Russiangovernment may shouldexport the energyand import the be aboutto conductthe experiment.We Menshikovgoes even further, however. He manufacturinggoods. At worldprices it will learnfrom the outcomeof that. arguesthat it is logicallywithout founda- may be that manufacturingis not com- tionto questionfigures when we are un- petitive,and that it canonly survive if value The authoris professorin the Depart- certainas to theiractual amounts. It is as is redistributedfrom elsewhere. This can mentof Economics,Pennsylvania State ifwe must decide if a heavyload can safely take the form of protectivetariffs or of University,University Park, PA. 16802 makeit acrossa bridge.When informed the virtualeconomy. USA, teL.814-863-265Z fax 814-863- thatthe weight of thecargo may in fact be 4775, E-mail: [email protected] twicewhat is recorded,and that the load- There are too many confusions in Intemet:http://econ.la.psu.edu/bbickes/ bearingcapacity of thebridge may be half Menshikov'scomments on opportunity index.htm, and, The New Economic of whatis reported,Menshikov would ar- costto discusshere. The keyissue be- School,Nakhimovskyprosp. 47 Moscow guethat the cargo should pass anyway: if tween Menshikovand myself appears 117418,Russia, tel.7-095-129-3722/ we arenot certain of thedegree to which to be over the causesof the crisisin 3844, fax 7-095-129-3722,E-mail: the figuresare inflatedwe cannotques- Russia. Menshikovsees the output [email protected] tion the safetyof the trip. I don't think declinedue to lack of demand.I see it Menshikov'slogic makes for a goodsafety as the resultof too manyinefficient pro-

* TRANSmoN, October 1998 i) 1998 The World Bank Shall We Forget tiheLatin American Precedents? by Katharina Mueller M, ichal Rutkowskiprovides a well-knownscholar of Latin American borrowingfrom the Argentine precedent goodoverall perspective on the pensionreforms, had already coined the (even if, admittedly,the Latvian ex- recentpension reform trends label"mixed reform"forthis paradigmatic ample was also influentialin the Pol- in transitioneconomies. However, I dis- choice(as opposedto the 'substitutive" ish context). Is this because it has agree with his leitmotifthat the 'new Chileancase). turnedout that the (still radical)mixed generation"of pensionreforms in this pensionreforms sell better in the re- regionis differentfrom thosein the ex- The parallelsbetween the basicset up gion withoutexplicit reference to Latin isting LatinAmerican blueprints. When of the 'Argentine model"and the cur- Americanblueprints, given that Cen- predictingthat "transition economies are rent Hungarianand Polish reform paths tral Europeansare very sensitiveto increasinglylikely to end up with mixed are striking, and DimitriVittas, one of havingany kind of Latin Americaniza- systems,"that combinea public, pay- Mr. Rutkowski's colleagues at the tion proposedto them? as-you-goand a private,fully funded com- Bank, recently has stressed the rel- ponent on a mandatory basis, Mr. evanceof theArgentine model for East- The authoris professorat FrankfurtIn- Rutkowskiis right.However, this type of ern Europe. Therefore, I am very stitutefor TransformationStudies at Eu- old age securityreform was pioneered surprisedthat the formerleader of the ropean University,Viadrina, Frankfurtl byArgentina(1994)and Uruguay (1995). Polish pensionreform team is unwill- Oder,Germany, Email: kmueller@euv- Consequently,Carmelo Mesa-Lago, a ing to acknowledgethe conspicuous frankfurt-o.de Milestones of Transition

Centraland EastemEurope CentralEurope-that have been doing a tries are Polandwill have six projects, goodjob. TheWashington-based IIF has the CzechRepublic seven, Bulgaria six, Crisis reducesprivate capital flows. a membershipof 300commercial banks, Estoniafour, Lithuania eight, and Latvia The world'sfinancial crisis is expected investmentfunds, insurance companies, five.Called "twinning," the program aims to reduceprivate capital flows into Cen- and pensionfunds worldwide.(From to pairbureaucrats and technical experts tral and EasternEurope by 35 percent RFE/RLcorrespondent, Robert Lyle) from EU memberstates with counter- thisyear. The global organization of com- part officials in the EasternEuropean mercialfinancial institutions, the Insti- EU advisersto boostEast's adminis- hostcountries. The initialseries of twin- tute of InternationalFinance (IIF), says trativecapacity. The EuropeanUnion ninginvolves four keyareas: agriculture, it expects private capital, which had is aboutto launcha new effortto help environment,finance, and justice and topped$67.5 billion flowing into the re- the10 Central and Eastern European ap- homeaffairs. (From RFEIRL correspon- gion in 1997,to dropto just over $44 plicantcountries make the administra- dent, BreffniO'Rourke) billionthis year.It projectsthat the flows tivereforms essential to theirrespective will improve only by $200 million,to membershipsin the EU.Within the next Shakeoutin Estonia'sfinancial mar- $44.2billion in 1999.In recentyears pri- few monthsthe EU Commissionwill ketscontinues. In early Octoberthe Es- vate capital has become the major send expertsto each of the 10 coun- tonianCentral bank honored the troubled sourceof financingfor emergingmarket tries to advisethe hostgovemments on ERA bank'srequest to haveits license economiesaround the world. In 1997the howto maketheir administrativeprac- suspendedfortwo weeks. The ERA bank privateflows into Centraland Eastern tices conformto EU legislation.Under wanted to close its doors becauseit Europewere eight times the official flows the initial$80 million-phaseof the pro- fearedit couldno longerguarantee the fromother governments and international gram, almost100 projectswill start in depositsof customers.ERA bank de- institutionslike the IMF and the World thefirst few monthsof nextyear. Roma- positsrepresent only about 2 percentof Bank.The IIF is urginginvestors to dif- niatops the list with 19projects, followed all Estonianbank deposits.The Esto- ferentiatebetween those countriesthat by Hungarywith 16, Sloveniawith 14, niansecurities administration halted the are in trouble and those-primarily in and Slovakiawith 13. The othercoun- tradingof eightinvestment funds. In all

VD1998TheWorld Bank TRANSITION,October 1998 * cases,the net value of the funds had Romania broadmeasures to expediedemocrati- fallen belowthe minimumrequirement zation.He proposedcurtailing the pow- of 5 millionkoons. Most of thefunds had Economic performance worsens. ersof thepresident and increasing those investmentsin Russia'sfinancial mar- Romania'sGDP dropped by 5.2 percent of parliament,making the government kets.Decline of the Estonianstock ex- in thefirst six months of 1998,compared moreaccountable to the parliament,en- changehas been attributedmainly to with the sameperiod last year, the Na- hancingthe independenceof the judi- upheavalsin the bankingsector and il- tionalStatistics Board said on 30 Sep- ciaryby appointinga separatehead of liquidmarkets. During the monthof Oc- tember.The balanceof tradedeficit for the SupremeCourt (that post is currently tober uncertaintyreigned in all three the sameperiod has grown to $1.66bil- held by the country'spresident), and Balticfinancial markets. lion,compared with $1.36 billionin the privatizingsome state-ownedmedia. first halfof 1997.Exports dropped by 8.9 HungaryGDP up 4.8 percent in first percentand importsby 12.8percent. Ukraine half. Hungary'sGDP was 4.8 percent higherin thefirst halfof 1998than in the CIS Government restricts foreign cur- same periodlast year, the CentralSta- rency purchases.In a bid to staveoff tisticsOffice reports.Exports of goods Azerbaijan the depletionof its reserves,the Ukrai- andservices rose by 22 percent,imports nian NationalBank (NBU) has sharply by 25 percentand 11 percent more was Caspianpipeline decision imminent. tightenedprocedures for purchasingfor- spenton investmentprojects in the first The AzerbaijanIntemational Operating eigncurrency as of October1. The new half thanin thesame period of lastyear. Company(AIOC) will makeits recom- rulesstipulate that foreigncurrency can The largestitem in domesticconsump- mendationin Novemberon the optimal be purchased by authorized banks tion,personal consumption, rose by 2.9 routefor the so-calledMain Export Pipe- onlyif their customersproduce the re- percentin the first half, andby 4.3 per- line for Azerbaijan'sCaspian oil, Presi- quired documentation,which include cent in the secondquarter. Consumer dent HeidarAliev said in October.Aliev foreign-trade contracts and tax and pricesrose by 15.3 percentin the first reaffirmed his determinationthat the customsclearance. Banks are obliged nine months.Real wages rose by 3.3 route,leading from Bakuto the Mediter- to providethe StateTax Administration percentbetween January and August. raneanport of Ceyhanin Turkey,should with informationabout customers' de- The currentaccount deficit totaled$1 be chosen.(This pipelineavoids both sires to buy foreign currency,includ- billionin the first eight months,$285 Iranand the northern route through Rus- ing passport details of customers' millionmore than in thesame period last siaand Georgia.) Aliev's son llham,who employersand accountants.Permits year.The general government deficit, not is deputypresident of the Azerbaijan for purchasingforeign currency are to includinglocal governments,was 350 StateOil CompanySOCAR, also denied be issued by NBU regional depart- billionforints ($1.7 billion), in the first nine that Bakuis contemplatingan alterna- ments. months,66 billionforints more than one tive oil route.American oil companyex- yearearlier. ecutives and top U.S. government Asia officialsadmitted at a specialmeeting Slovakia that the 1,080-mileBaku-Ceyhan pipe- Vietnam line is notcurrently commercially viable. National chapter of Transparency Theystressed, however, that it wouldbe Government seeks boost in rural International. The Center for Eco- built if Caspianoil exportsgrow suffi- economy. VietnamesePrime Minister nomicDevelopment, Bratislava, as an ciently.Persistently low oil pricesover Phan Van Khai told the country'sna- acknowledgementof is devotionin com- the pastyear, as well as a seriesof dis- tional assemblythat his government bating corruption and supporting in- appointingexploration wells, have led to wouldattempt to tackleworsening eco- creasedtransparency, was entrustedto a downgradeof near-termestimates of nomic problemswith a new emphasis organizeand be responsiblefor the lo- exportvolumes from the Caspian. on rural and agriculturaldevelopment. cal chapter of TransparencyInterna- Khaisaid that Vietnam would try to cre- tional.As of September21, 1998,the Kazakhstan ate morethan a millionnew jobs next Slovakiachapter has been launched year andwould aim for GDP growthof underthe guidanceof the preparatory Liberalizationmeasures. In his annual between5 and 6 percent. committee: Eugen Juryzca, Emilia addressto parliamenton September 30, Sicakova,and RastislavKovacik. PresidentNursultan Nazarbayev outlined

i TRANSITION,October 1998 © 1998 The World Bank Conference Diary

Meetingof the InternationalECPD Information:EuroForum, tel. 440-171- Language:English PermanentStudy Groupon Transi- 878-6888or 440-171-878-6886,fax440- Callfor papers:Deadline's December31, tion and Privatization 171-878-6885,Internet: http://www. 1998. December4-5, 1998,Belgrade, FR of mondaq.com Information:Enterprise in Transition, Yugoslavia Facultyof Economics,Radonanova 13, InternationalConference: Recent De- HR 21000Split, Croatia, E-mail: eitconf Organizer:The EuropeanCenter for velopmentsand Problems in the @efst.hr,Internet: http://www.efst.hr Peaceand Development(ECPD) of the TransitionEconomies eitconfl Universityfor Peace,established by the March25-27, 1999, Skopje, Macedonia UnitedNations. SummerSymposium for Graduate Topic:Recent lessons from Transition Organizer:Faculty of Economics,Sts. Students in InternationalAffairs and Privatization-Problemsof lnstitu- Cyril and MethodiusUniversity. June 10-15,1999, Annapolis, MD and tons and CorporateGovernance. The Information:Mrs. ValentinaGanzovska, Washington,D.C., UnitedStates gatheringwill bring togethera mix of Faculty of Economics, Blvd. Krste academiceconomists, corporate repre- Misirkovbb, Skopje91000, Macedonia, Organizer:Women in InternationalSe- sentatives, and government advisersto tel. 38991 223-245, fax 38991 118-701, curity (WIIS). updateinformation and review and gen- E-mail:[email protected] Topics:Citizens, Civil Society, and Con- erate some ideas on postprivatization flict; The NuclearCities' Initiafive-Eth- ownershipstructures and their impacts PassauerWorkshop-Internationale nic Conflictin the 215'Century, the UN on enterpriseperformance, institutional Wirtschaftsbeziehungen and Civil Societies;Latin America: Poli- changes,corporate governance and re- (First PassauWorkshop-Interna- fics for the 21s1Century. structuringof large loss-makingenter- tionalEconomic Relations) Opento individualsenrolled in a master's prises,as well asthe roleof thefinancial April 15-17,1999, Passau, Germany or doctoralprogram. Costs are covered sectorin promotingenterprise reform. by WIIS. Information:Gordana Hofmann, Euro- Organizer:University of Passau,Depart- Information:Women in InternationalSe- peanCenter for Peaceand Development mentof Economics,Institute for Finance curity/CISSM,University of Marlyand, (ECPD)of the Universityfor Peace,es- and ForeignRelations. CollegePark, MD 20742, United States, tablished by the United Nations, Applicationsincluding a 2-3 page sum- tel. 1-301-405-4020,fax 1-301-403-8107, Belgrade,Terazije 41, Yugoslavia,tel. maryof the plannedlecture in German, E-mail: [email protected]. edu, 381-11-3246-041,3246-042, 3246-043, name,title, key words,JEL classifica- http://vww.puaf.umd.eduMWIIS 3246-044,3246-045, fax 381-11-3240- tion andaddress and institutional affilia- 673, 3234-082,E-mail: ecpd@afrodita. tion of the lecturer accepted until 31st National Conventionof the rcub.bg.ac.yu December1, 1998. AmericanAssociation for the Ad- Information: Carsten Eckel, Lehrstuhl vancement of Slavic Studies(AAASS) Investment Opportunities in fuer VWL mit SchwerpunktGeld und November18-21, 1999, St. Louis,Mis- Kazakhstan:Exploit New Opportuni- Aussenwirtschaft,Universitaet Passau, souri, UnitedStates ties to RealizeInvestment Potential 94030 Passau,Germany, tel. 49-851- December 8-9, 1998, London, United 509-2534, fax 49-851-509-2532, E-mail.: Organizer: AAASS Kingdom [email protected],Internet: http:// Information:http.//fax.harvard.edul www.wiwi. uni-passau. dellehrstuehle/ Organizers:State InvestmentCommit- ruebel/pwiw/home.htm 32nd National Conventionof the tee of the Republicof Kazakhstanand American Association for the Ad- EuroForum. Third InternationalConference on vancementof SlavicStudies Topics:Economic and BusinessOut- Enterprisesin Transition November9-12, 2000, Denver, Colorado, look:The ConfinuingRole of the EBRD May27-29, 1999, Split, Croatia UnitedStates in Kazakhstan;Investment and Export Prospectsin the Oil and Gas Industry. Organizer:Faculty of Economics,Split, Organizer:AAASS Languages:English and Russian. Croatia. Information:http.//fax.harvard.edu/

© 1998 The World Bank TRANSmION,October 1998 X World Bank/IMF Agenda WolfensohnOutlines World Bank's heritageto ensurethat developmentis ened by suddenloss of market confi- DevelopmentStrategy firmlybased and historicallygrounded. dencebe paid back withinone to two- and-a-halfyears and cost3 percentage World BankGroup President James D. The Bank Helps PreserveCultural pointsabove market rates. Wolfensohn,in his speechto the 1998 Heritage AnnualMeetings of the WorldBank and Public InformationCenter in Bosnia the IntemationalMonetary Fund, called In the transitioneconomies of Europe for a reformagenda that addressesis- and CentralAsia, the Bankis working On October9 the World BankPerma- sues of governanceand socialjustice on 11cultural heritage support projects. nentMission to Bosniaopened a Public as well as far-reachingcorporate and fi- The St. Petersburgproject ($21 million) InformationCenter, which will offerinfor- nancialsector reforms.He confirmed andthe Georgiaproject ($5 million)are mationon Bank operations in Bosnia and that,while private sector flowsfall, the alreadybeing implemented. Nine other worldwide.The centeris offeringdocu- Bankwould continue to play its part by programs-in Albania, Azerbaijan, mentationon projects,sector studies, maintaininglast year's higherlevel of Bosnia,Bulgaria, Croatia, Macedonia, andeconomic reports on Bosnia,as well lendingin supportof this agenda. He also Romania,Turkey and Uzbekistan-are as a small library allocatedto publica- pledgedmore spending for immediate beingprepared. As MarittaKoch-Weser, tions,dealing with countriesin develop- socialsafety nets. The WorldBank was directorof the Environmentallyand So- ment and transition.(Intemet address: movingtoward a newapproach, one that cially SustainableDevelopment Unit, http://www.worldbank. org. ba) wouldmove beyond projects and, in part- LatinAmerica and the Caribbeanregion, nershipwith governments and civilsoci- pointedout, the Bank'sinitiative involves Ukraine and IMF at odds over the ety-including the private sector, assistancefor a varietyof conservation restructuringof domesticdebt rigorouslypursue the socialand struc- and supportactivities, working in close tural priorities. collaborationwith nongovernmentalor- The IMF suggestedthat the Ukrainian ganizabonsand other specialized agen- govemmentwould violate the agreed-on The newframework of the Bankwould cies suchas UNESCO,the Councilof three-yeareconomic reform program if it embracefive guidingprinciples: Europe, and the World Monuments convertedfunds paid to foreigninvestors * Supportinggood governance-trans- Fund. in hryvniasinto dollars. The move, the IMF parency,the free flow of information,a noted,would drain Ukraine's foreign cur- commitmentto fightcorruption, and well- U.S. FundingConditions to IMF rency reservesbelow the levelagreed- trained,properly remunerated civil ser- on with the IMF.According to the IMF, vants The InternationalMonetary Fund and its holdersof suchpaper would have to agree * Supportinga legal system that guards biggestmembers, the Groupof Seven to rollingover their earnings or accepting againstcapricious actions-a modern, industrialnations, are likely to accept paymentin hryvnias.However, at the end andtransparent financial system that is the stringsthat Congressis attaching of 1997,the UkrainianCentral bank and adequatelysupervised, with internation- to the $18 billionU.S. contribution,ac- governmentissued a specialresolution ally recognizedaccountancy and audit- cordingto newsreports. U.S. support to in connectionwith the bondswhereby ing standards theIMF would be contingenton the chair- investorswould be allowed to converttheir * Supportingpolicies that fosterinclu- manof the FederalReserve and the sec- earningsto dollars. sion-education for all (especially retaryof the Treasury certifying that major womenand girls), health care, social pro- IMFshareholders have agreed to: World BankFY98: DecliningNet In- tection,and early childhood development * Requireborrowing countries to set come * Supportingpublic services and infra- schedulesfor liberalizingtrade, eliminat- structurenecessary for communicationsing government-directed lending and ap- Thenet income of the InternationalBank andtransport, as well as policiesfor cre- proving bankruptcy laws fair to all for Reconstructionand Development atingliveable cities and addressing prob- creditors (IBRD),part of the World Bank,fell to lemsof growingurban areas * Requirethe IMFto publishsumma- $1.24billion in fiscal 1998from $1.29 * Supportingenvironmental and human riesof boardmeetings, letters of intent, billionin the previousfiscal year, accord- sustainabilitythat would includingwa- and policypapers with exceptions ingto the Bank'sannual report released ter, energy,food security,and cultural * Requirethatloanstocountriesthreat-end-September. Modest interest rates

M TRANSITION,October 1998 I:( 1998The World Bank and higherloan-loss provisioning were N mainly responsiblefor the decline last New Books and Workmg Papers fiscalyear, which ended June 30, said MarkMalloch-Brown, vice presidentfor The Macroeconomicsand GrowthGroup regrets that it is unableto providethe externalaffairs at the Bank. (As a re- publicationslisted. sult,after the lastfiscal year ended, the Bank's Board approveda higher fee Bank'strr Boaid atpimprovedahingtherBa World Bank Publications tel. 202-473-6896,fax 202-522-1159, structure aimed at improving the Bank's Inemt Itbd'olbnog ai net increasedincome.The the Bank ~~Internet:[email protected]. David To receiveordering and price informa- Tarrmay be contactedat dtarr@world spread that is chargedto borrowers tion for WorldBank publications (with bankorg abovefunding costs to 75 basis points the exceptionof workingpapers), write: from 50 basis points,and It added a WorldBank, P.O. Box 7247-8619,Phila- GeorgeR.G. Clarke and Robert Cull, Why front-ppend-f .ofi10bai points.) delphia,PA 19170,United States,tel. Privatize?The Case of Argentina's Stepedup povisionng to aosi- 202-473-1155,fax 202-676-0581;or visit PublicProvincial Banks, WPS 1972, nificantamount of new loansto coun-''' tries in crisisalso affected net income the World Bank bookstores, in the September1998, 36 p. In fiscal 199.prvisUnited States, 701 18th Street,N.W, Toorder: Paulina Sintim-Aboagye, Room lofssesamounted trov$251miion, orlan- Washington,D.C., or in France,66 av- MC3-422,tel. 202-473-8526, fax 202-522- losses amountedto $251 million, com-' ' paredm to nonly ienue .3 d'lena, 75116 Paris, Email: 1155, Internet: psintimaboagye@ ous fiscalyear. [email protected],Intemet: http:// worldbank.org.The authors maybe con- wwwworldbank.org tacted at gclarke@worldbankorgor Vietnam Accelerates Assistance rcull~worIdbankorg Implementation WorkingPapers Argentina,a leaderamong developing The World Bank's Vietnam Country Dominiquevan de Walle, Protecting the countriesin restructuringits banking Teammet with officialsfrom Vietnam's Poorin Vietnam'sEmerging Market sector,privatzed roughly half of its pub- Ministry of Planningand Investment Economy,WPS 1969, September 1998, licprovincial banks. The provincial banks (MPI)at the end of Octoberto discuss 39 p. that remainedin the public sector did theimproving quality of Vietnam'sinvest- Toorder: Cynthia Bernardo, Room MC2- not demonstratethe sameperformance mentportfolio and the Bank'snew part- 501, tel. 202-473-1148,fax 202-522- gains as privatizedprovincial banks. nershipprogram launched earlier this 1154,Internet:cbernardo@worldbank. Authors estimate fiscal savings associ- year.A joint projectof the World Bank org. The authormay be contactedat atedwith privatizing the banks rather than and Japanesetrust funds to address dvandewalle@worldbankorg. keepingthem public and later recapital- implementationobstacles of officialde- izingthem. The privatizationprocess in- velopmentassistance (ODA) in Vietnam, The very principleson whichVietnam's cludedsetting up residual entities for the is near completion.(ODA to Vietnam highlydecentralized, community-based public provincialbanks' assetsand Ii- nowtotals more than $10.8 billion in com- assistanceand safety net systemis built abilitiesthat privatebuyers found unat- mitmentsand runs at morethan $2.4 are threatenedby the country'sincreas- tractive, and creating a special fund billionannually for the past few years). inghousehold mobility, without which the (FondoFiduciario) to convertthe short- The projectprovided training programs marketsystem cannot function. Devel- term liabilitiesof these residualentites for governmentstaff and improvedthe opinga reliable,effective system of re- into longer-termobligabons. The Fondo, policyenvironment for investments.(An distribubvetransfers and safetynets to createdthrough cooperation between nualODA disbursementshave climbed steadilyto about$1 billionin 1997.The replacefaltering local insttutions will be Argentina'sgovernment and the World World Bank has disbursedmore than importantif Vietnamis to makea suc- Bank,waskeyinmakingbankpivalization $700million of its$2.1 billionin commit- cessfultransition to a marketeconomy. politicallyfeasible. mentsto date.)Under discussion were the Bank'sproposed Portfolio Improve- ThomasF. Rutherford and David G. Tarr, Stijn Claessens, Daniel Oks, and mentPlan for FY99,which will focuson Trade Liberalization and Endog- RossanaPolastri, Capital Flowsto continuedassistance to Vietnam'sgov- enous Growth in a Small Open Centraland EastemEurope and the ernmentwithspecial regard to thegrow- Economy:AQuantitativeAssessment, Former Soviet Union, WPS 1976, ing numberof locallytargeted rural and WPS 1970,September 1998, 49 p. September1998, 44 p. socialsector programs. To order:Lili Tabada,Room MC3-333, To order: Rose Vo,Room MC10-628,

C 1998 The World Bank TRANSITION,October 1998 * tel.202-473-3722,fax 202-522-2031, transplant Western institutional and Financialintegration does not make it Intemet:hvo1@worldbank. The authors regulatorynorms of good practiceinto moredifficult to achievemacroeconomic may be contacted at cclaessens transitioneconomies may producedis- stability,although large short-term capi- @worldbank.orgor rpolastri@world appointing,even counterproductive,re- tal flows can lead to misalignedasset bank.org sults. prices,including exchange rates. Finan- cial integration,however, limits how far JyotsnaJalan and Martin Ravallion, Be- Thesafety of anindividual bank depends countriescan pursuepolicies incompat- havioral Responsesto Risk in Rural on the bank'sown internalinformation iblewith medium-termfinancial stability. China, WPS 1978,September 1998, and informationprocessing capabilities; This discipliningeffect also applies- 35 p. onthe sophistication ofthe banking prod- through pressureson financial mar- Toorder: Patricia Sader, room MC3-632, uctsit offers;as well as onthe external kets-to the privatesector. Globalization telephone202-473-3902, fax 202-522- operatingenvironment that the bank is easingfinancing constraints and ex- 1153,Internet:[email protected]. faces. Bank 'safety' is an elusivecon- tendingthe time duringwhich countries The authors may be contacted at cept in transitioneconomies. A transi- can make adjustments. [email protected] mravallion@ tional bankingsystem may be quite To order: Bill Nedrow,Room G2-072, worldbankorg "safe"even though regulatory reform may tel. 202-473-1585,fax 202-334-8350, have progressedonly minimally.The Internet:[email protected]. The GerardCaprio, Jr., Banking on Crises: analysishelps to accountfor several authorsmay be contactedat mdailami@ ExpensiveLessons from Recent Fi- paradoxesobserved in transitionbank- worldbankorgor [email protected] nancialCrises, WPS 1979, September ing systems, includingthe relatively 1998,32 p. long-termsurvival of banksthat, by any DiscussionPapers Toorder: Paulina Sintim-Aboagye, Room objectivestandard, are insolvent. MC3-422,tel. 202-473-8526, fax 202-522- To order:Diana Cortijo, Room H2-023, Laszlo Lovei,Energy in Europe and 1155,Internet:psintimaboagye@world tel. 202-458-4005,fax 202-477-3288, Central Asia: A Sector Strategy for bank.org.The author may be contacted Internet:dcortijoiworldbank.org. The the World BankGroup, No. 393, 1998, at gcaprio@worldbankorg authors may be contacted at aroe 42 p. cworldbank.org or psiegelbaum@ DeonFilmer and LantPritchett, The Ef- worldbankorg Sincethe late 1980sthe energysector fect of HouseholdWealth on Educa- in many countriesin Europeand Cen- tional Attainment: Demographicand MansoorDailami and Nadeem ul Haque, tral Asia has been affectedby excess Health Survey Evidence,WPS 1980, What MacroeconomicPolicies Are productioncapacity, lower-quality sup- September1998, 38 p. "Sound?" WPS 1995,October 1998, plies,decreasing demand, and inefficient Toorder: Sheila Fallon, Room MC3-638, 46 p. consumption.This report outlinesthe tel. 202-473-8009,fax 202-522-1153, four mainreform objectives of theWorld Internetaddress [email protected]. In the new globalizedfinancial market Bank: assistinggovernments to protect The authors may be contacted at environment,wherevolatilityhasbecomethe publicinterest, supporting economic [email protected] Ipritchett@ afact of life,what broad principles should transition, facilitating private invest- worldbankorg guidedeveloping and transitionecono- ments,and promoting regional initiatives mies' macroeconomicmanagement- to increaseenergy trade. Alan Roe, Paul Siegelbaum,and Tim howcan they assuresteady growth, full in employment,stable prices, and a viable King,Analyzing Financial Sectors in externalpayments situation? Capital MohinderS. Mudahar,Kyrgyz Repub- Transition: With Special Reference controlsand foreignexchange restric- lic: Strategy for Rural Growth and to the Former Soviet Union, WPS tionshave been dismantled significantly Poverty Alleviation (Russian), No. 1982,September 1998, 55 p. in severaleconomies. In 1970 only 34 394R,1998, 167 p. countries-30percent of theInternational Theeconomic transifion from a command MonetaryFund's membership-had as- MohinderS. Mudahar,Robert W. Jolly, to a market economyis a complex, sumedArticle Vil of the IMFArticles of and JitendraP. Srivastava,Transform- messyprocess, during which the incen- Agreement,declaring their currency con- ing AgriculturalResearch Systems in tivesof economicagents may be signifi- vertibleon currentaccount transactions. Transition Economies: The Case of cantly differentfrom those familiar to By 1997this figurehad increased to 77 Russia (RussianVersion), No. 396R, Westerneconomies. Thus aKtemptsto percent. 1998,142 p.

* TRANSITION,October 1998 d 1998The World Bank OtherWorld Bank Publicatfons Thisvolume provides a comprehensiveAlcira Kreimer,John Eriksson,Robert descriptionof Hungary'sexperience Muscat,Margaret Arnold, Colin Scott, AssessingAid: What Works, What with publicfinance reform, includinga The World Bank's Experiencewith Doesn't, and Why-A World Bank historyof the reform process;an em- Post-ConflictReconstruction-Opera- PolicyResearch Report, Oxford Uni- pirical analysis of trends in public tions EvaluationStudy, September versityPress (for the WorldBank), No- spendingand revenues;evidence of 1998,120p. vember1998, 160 p. Hungary'sability to movetoward acces- sionto the EuropeanUnion (EU); a de- GerardCaprio, Jr., WilliamC. Hunter, Ismail Serageldin and Joan Martin- scriptionof policyreforms in the public George G. Kaufman, and Danny M. Brown (eds.) Ethicsand Values:A welfaresystem; an analysisof the re- Leipziger(eds.) Preventing Bank Cri- Global Perspective-Proceedings formsin keysocial areas (such as pen- ses: Lessonsfrom Recent Global of an AssociatedEvent of the Fifth sion, health care, and education),in BankFailures, EDI DevelopmentStud- AnnualWorld Bank Conferenceon publicmanagement (treasury, local gov- ies, September,1998, 392 p. Environmentally& Socially Sus- ernment,and wage and employment), tainable Development,ESSD Se- as well as in the tax system. John Nash and Wendy Takacs(eds.) ries, September1998, 124 p. Trade Policy Reform:Lessons and The World BankResearch Program Implications,1998, 372 p. Nicolas Mathieu, Financial Sector 1998:Abstracts of CurrentStudies, Reform: A Reviewof World Bank October1998, 184 p. IMF WorkingPapers Assistance,September 1998, 104p. A compilationof reportson 193 research To order:IMF PublicationServices, 700 Lajos Bokros and Jean-Jacques projectsof the World Bankthat have 19th Street, N.W, Washington,D.C. Dethier (eds.) Public Finance Re- been initiated,are underway, or com- 20431,United States, tel. 202-623-7430, form duringthe Transition:The Ex- pletedin fiscalyear 1998 (which started fax 202-623-7201,Email:publications perience of Hungary, September onJuly 1,1997). The abstracts describ- @imf.org,Internet:http://www.imf.org 1998,596 p. ing the analyticalmethods used, the (Full text of workingpapers can be un- findingsto date, and their policyimpli- loadedand printedfree in PDFformat, Publicfinance reform is simultaneously cations are groupedunder nine main usingAdobe Acrobat Reader 3.0). a process of fiscal adjustment and headings: transitioneconomies, pov- structuralreforms in the publicsector. erty and socialwelfare, labor markets PeterF Christoffersenand PeterDoyle, Undersocialist rule the conceptof pub- andeducation, environmentally sustain- From Inflation to Growth-Eight lic financewas nebulous,since there abledevelopment, infrastructure and ur- Years of TransitionWP 98/100,1998, was no clear delineationbetween pri- ban development,macroeconomics, 36 p. vate and public sectors. Making the internationaleconomics, domestic fi- transitionfrom a socialisteconomy re- nanceand capital markets, and private KalraSanjay, Inflation and MoneyDe- quires profoundinstitutional changes, sector developmentand public sector mand in Albania, WP 98/101,1998, primarilyto create a governmentsec- management. 34 p. tor that is adapted to the market economy. East Asia: The Roadto Recovery- HelmutWagner, Central bankingin A WorldBank Study, November 1998, TransitionCountries,WP 98/126,1998. The macrosituation was not favorable: 170 p. thetransition-generated recession, an in- GuntherTaube and Jeromin Zettelmeyer, creasingfiscal disequilibrium,compli- This comprehensiveWorld Bankstudy Output Decline and Recovery in catedthe lifeof the decisionmakers.The takes a look at what happenedto the Uzbekistan-Past Performanceand stabilizatonprogram announced in March EastAsiamiracle-to the region'strade Future Prospects,WP 98/132,1998. 1995was accompaniedby a wide rang- and competitiveness,its financialsec- ing structuralreform program.Cuts in tor, the corporatesector's financial per- Jeromin Zettelmeyer, The Uzbek govemmentexpenditure (from 60 percent formanceand governance, the depth of Growth PuzzleWP 98/133,1998. of GDP in 1994to 50 percentby 1996) the social crisis, and what should be reducedthe fiscal deficit, and in 1997Hun- doneto help EastAsia on the road to Oleh Havrylyshyn,Ivailo Izvorski,and garyresumed economic growth. recovery. Ron van Rooden, Recovery and

C) 1998 The World Bank TRANsmoN,October 1998 * Growth in Transition Economies Author analyzesand reconsidersone Lindenbornstr.22, D-50823,Koin, tel. 1990-97-A Stylized Regression of the greateconomic dramas of West- 221-574-70,fax 221-574-110,Intemet: Analysis,WP 98/141, 1998. ern history,the marchto capitalismin http://mwww.uni-koeln.de/externlbiost Russia,Hungary, Poland and the Czech AlexanderRepkine and PatrickWalsh, Republic.The periodis from 1989,after StanislavSimanovsky, Science and EuropeanTrade and Foreign Direct the fall of the BerlinWall, when the lib- Technologyin Russia:Problems and InvestmentU-Shaping Industrial Out- eratedcountries rushed headlong into Prospects,no. 18, 1998,41 p. put in Centraland Eastern Europe- democracyand capitalism.Special em- Theory and Evidence, WP 98/150, phasisis on the role, often misunder- GerhardSimon, Welchen Raum Lasst 1998. stood, played by the International die Geschichtefur die Modemisierung MonetaryFund and the World Bank. Ruilands? no. 19, 1998,33 p. CarloCotarelli and Gyorgy Szapary (edi- Theyfinanced and guided the transition, tors), ModerateInflation-The Expe- while issuingfree-market strictures in Wolf Oschlies, Ursachen und rience of TransitionEconomies joint the process.Russia, in its agony,of- Kulmination eines alt-neuenBalkan- publicationof IMFand NationalBank of fers a laboratory for the conflicting Konflikts, no.20, 1998,29 p. Hungary),1998, 283 p. claimsof free-markettheory against a more pragmatic, experimental ap- Irina Smetanenko, Konversion in Authors,including the editors,further proach. China's hybrid-capitalismis Rulland, no. 26, 1998,32 p. StanleyFischer, Stanislaw Gomulka, alsoanalyzed and compared. OlivierBlanchard, and Janos Kornai, Heiko Pleines, Korruption und during a recent seminar, held in KarenS. Vorstand Willadee Wehmeyer Kriminalitat im Russischen Budapest,under the title 'Disinflation (editors),Financial Market Restructur- Bankensektor,no. 28, 1998,40 p. in Eastern and Central Europe" dis- ing in Selected Central European cussedissues related to moderatein- Countries,1998, 272 p. Anatoliy S. Grytsenko,Defence Re- flation.Is moderateinflation a problem, form in Ukraine: Chronologyof the and if so, how can it be reduced?How HOsnOKizilyalli, Economics of Transi- First FiveYears, no. 29, 1998,38 p. can short-runcosts of disinflationmini- tion: A New Methodologyfor Trans- mized?Should disinflation be gradual forming a Socialist Economy to a or rapid?The volumecontains all the Market-ledEconomy and Sketchesof presentationsand discussionsof the a Workable MacroeconomicTheory, Centerfor Social and EconomicRe- conference. 1998,608 p. search (CASE-CEU)Publications

The authorputs forth a newforecasting Toorder: CASE-CEU, Bagatela 14, 00- andplanning methodology for transform- 585Warsaw, Poland, tel. 4822-628-0912, Ashgate Publishing, Aldershot/ ing a socialistor closed and/ormixed fax 4822-628-6581,E-mail: case@ Brookfield USAlSingapore/Sydney economyto a freemarket economy. The case.com.pl methodologymakes use of existing To order: Ashgate, Old Post Road, structuresand capitalstock during tran- UgoPagano, Transition and the "Spe- Brookfield,VT 05036-9704 USA, tel: 800- sition, as opposedto a completede- ciation" of the JapaneseModel, WP 535-9544or 802-276-3162,fax 802-276- struction brought about under a "big 4, June 1998,35 p. 3837,Email: [email protected]; bang" approach. Author analyzes weak- UK and Europe;Gower Customer Ser- nessesof otherforecasting methods that Laszlo Urban, Trade-offs Between vice:Bookpoint Limited, 39 MiltonPark, havebeen developed for transformation. Macro-Performanceand Micro-Re- Abingdon,Oxon, OX14 4TD UK, Tel:44- structuring in TransitionEconomies: 235-827-730fax: 44-235-400-454 E-Mail: Contrastingthe Czechand the Hun- [email protected] enquiriese garian Experience,WP 5, June1998, bookpoint.co.uk BundesinstitutfurOstwissenschaftliche35 p. und IntemationaleStudien, KoIn Irving S. Michelman,The March to MarylaMaliszewska, Romanian Trade: Capitalism in the Transition Coun- To order:Bundesinstitut fur Ostwissen- Recent Developmentsand Simula- tries, 1998,176 p. schaftlicheund InternationaleStudien, tions for 1998,WP 6, June1998, 31 p.

* TRANSmION, October 1998 X) 1998 The World Bank StanislawGomulka, Managing Capital SimeonDjankov and Bernard Hoekman, Thevolume describes the radical restruc- Flows in Poland,1995-1998, WP 7, Avenues of TechnologyTransfer: turingof the countrysidein Albania, Bul- June1998, 15 p. ForeignInvestment and Productivity garia, the Czech Republic, Eastern Changein the Czech Republic,no. GermanyHungary, Poland, Romania, 1883,1998, 20 p. Slovakia,and Slovenia.It examinesthe economicand politicalhistory of Cen- Center for East EuropeanStudies ThesiaI. Garnerand Katherine Terrell, A tral and EasternEurope, in the context Publications Gini DecompositionAnalysis of In- of the transitionprocess. Restoration of equalityin the Czechand SlovakRe- propertyownership meant partial resti- Toorder. CEES, Copenhagen Business publicsduring Transition, no. 1897, tutionof formerowners, and survival of a School, Dalgas Have 15, DK-2000 1998,19 p. largenumber of cooperativeson volun- Frederiksberg,tel. 4538-153-030,fax tarybasis, and on a reducedscale. State 4538-153-037, Internet: http:// Barry Eichengreenand Richard Kohl, farmswere either dissolve or transformed www.econ.cbs.dklinstitutes/cees The ExternalSector, The State and to joint-stockcompanies. In perspective, Developmentin EasternEurope, no. the challengeis to createcompetitive Snejina Michailova and Graham 1904,1998, 49 p. commercialfarms. To retainviable com- Hollinshead, Developmentsin the munities,creating new employmentop- Managementof HumanResources in JohnBennett and Huw David Dixon, Mon- portunities,in rural areas the service EasternEurope-The Case of Bul- etary Policyand Credit in China:A sectorshould be furtherdeveloped. garia,WP 9, 1998,28 p. TheoreticalAnalysis, no. 1906,21 p. Adrian Smith, ReconstructingThe PatrickArens, Strategic Decision Mak- Jozef Koningsand PatrickPaul Walsh, RegionalEconomy-industrial Trans- ing in the TransitionalEconomy of Disorganizationin the Transition Pro- formation and Regional Develop- Romania:The Case of TAMIVS.A., cess: Firm-Level Evidence from mentin Slovakia,EE, 1998,456 p. WP 11, 1998,33 p. Ukraine,no. 1928,1998, 31 p. The authorcriticizing the shocktherapy, Klaus E. Meyer,Multinational Enter- JohnDriffill and Marcus Miller, No Credit and arguesthat transitionto a market prisesand the Emergenceof Markets ForTransition: The Maastricht Treaty economycannot simplybe achieved and Networksin TransitionEcono- and GermanEmployment, no. 1929, throughfilling the supposedvacuum left mies,WP 12, 1998,26 p. July 1998,26 p. by the collapseof centralplanning. The presentmix of old andnew institutional KlausE. Meyer,Ten Years of Foreign structurescontribute to economicfrag- DirectInvestment in the FormerSo- mentationand divergence. viet Union: A Survey with Special EdwardElgar Publishing Focuson Kazakhstan,WP 13, 1998, OtherEdward Elgar Publications 39 p. To order: EdwardElgar Publishing,8 LansdownPlace, Chettenham,Glos. IstvanAbel, Pierre L. Siklos,and Istvan GL502HU, UK, tel.44-1242-226-934,P. Szekely, MoneyAnd Finance In fax.44-1242-262-111;Email: Info@e- TheTransition To A MarketEconomy, CenterforEconomicPolicyResearch elgar.co.uk or: 6, market St., 1998,210 p. (CEPR)Publications Northampton,MA 01060,tel: 413-584- 5551, fax: 413-584-9933, email: Authors,in their searchfor ingredients To order:CEPR, 90-98 Goswell Road, [email protected],web: http:// of a successfultransition to a market LondonECI V 7DB,United Kingdom, tel. www.e-elgar.co.uk economy,are focusingon four majoris- 44-171-878-2900,fax 44-171-878-2999, suesof the monetaryand financial sec- E-mail:[email protected] Studiesof Communismin Transition tors that emergedin CentralEurope: *Removal of state interventionand its MichaelBurda, The Consequencesof DavidTurnock (ed), Privatizationin effect on liquidity,and the availabilityof EU Enlargementfor Centraland East RuralEastern Europe-The Process credits. EuropeanLabor Markets, no. 1881, of Restitutionand Restructuring, EE, * Failure of credit markets (credit 1998,27 p. 1998,448 p. crunch)and the implicationsfor corpo-

C 1998The World Bank TRANSITION,October 1998 m rate finance. The Free MarketInstitute of Lithuania Child DevelopmentCentre (ICDC), *Role of propertyrights and the impor- undertookthis surveyform November Florence,Italy, 1998, 135 p. tance of bankruptcyin a well-function- 1997to March1998, interviewing about ing marketeconomy. 50 entrepreneurs(from banks, industrial The report is publishedthrough the *Effects of separatingthe centralbank and commercialbusinesses), to evalu- MONEE project (Monitoring Public from its commerciallending functions, ate presenteconomic situation and pro- Policyand SocialConditions in Central andthe consequences for implementing videforecast for the yearahead. Some and EasternEurope, the CIS, and the monetarypolicy. resultsof the survey:GDP growthin Baltics).The focusof this year'sreport 1998will reach5 percent;the shadow is education,including enrollment and Klaus Meyer, Direct Investmentin economywill contractslightly, but still other measuresof access, learning Economiesof Transition,EE (New willbe above20 percentof GDP,the av- achievement,schooling costs, and the Horizonsin InternationalBusiness Se- eragehousehold income will also rise decentralizationof educationalsystems. ries),1998, 308 p. slightly,reaching 2,600 litas in cities, The free databaseof socioeconomicin- and 1,150litas in ruralareas. dicators for 27 CEE/CIS countries StenBerglund, Tomas Hellen, and Frank To order: Free Market Institute of (TransMONEE3.0) allowsthe retrieval H. Aarebrot,(editors) The Handbook Of Lithuania,56 SirutesSt. Vilnius 2004, and manipulationof economicand so- PoliticalChange In EastemEurope, tel.: 822-722-584,fax: 822-721-279,E- cial indicatorsupdated through 1996, EdwardElgar, 1998, 416 p. mail:[email protected] from differentWeb sites. For more information, access the Janine R. Wedel, Collisionand Collu- UNICEF ICDC Web site at: http:// sion: The Strange Case of Western www.unicef-icdc.it/information/data- Other Publications Aid to Eastern Europe 1989-1998, bases/index.htm, or the Centre for St.MartinPress, NewYork, 1998,248 p. Europe's Children at http:// AdolfJ.H. Enthooven,Yaroslav V.Sokolov, eurochild.gla.ac.uk, or contact: Eco- SvetlanaM.Bychkova, Valery V.Kovalev, Privatizationaid to many Centraland nomic and Social Policy Programme, and MariaV.Semenova, Accounting, EasternEuropean enterprises proved to UNICEFICDC PiazzaSS. Annunziata, Auditingand Taxafionin the Russian be largelyineffective when its implemen- 12 50122 Florence, Italy, tel. 39-055- Federation-1998Study, Foundationfor tation ignored local authorities and or- 234-5258, fax 39-055-244-817E-mail: AppliedResearch, The Instituteof Man- ganizations.As assistancemoved east, [email protected] agementAccountants, Montvale, NJ and the samelessons had to be relearnedin The Centerfor InternationalAccounting each new recipientcountry. Local offi- KazimierzZ. Poznanski,Poland's Pro- Development,The Universityof Texasat cialsin Ukrainevoiced complaints almost tracted Transition: Institutional Dallas,Richardson, Texas, 1998, 300 p. identicalto those of CentralEuropean Changeand EconomicGrowth 1970- Toorder: http.//Avww.rutgers.edu/Account- officials, expressed several years earlier: 1994,Cambridge University Press, Cam- ing/raw/ima/publications/newbooks.htmthat donorssent fly-in-fly-outadvisers bridge/New York, 1996, 337p. whowere burdensome, stayed in expen- Russianaccounting had a 'glorious"past sivehotels, and knew little about the host until 1917.The systemthat developed country(in Poland they were dubbed the after1920,servedwelltheSovietauthori-'Mariott Brigades").In Russia,on the Newsletters,Web sites ties in their policyof centralizedplan- other hand, donorspreferred to work ning, and administrativecontrol. The throughlocal elites who "could get things ChinaWatch, a monthlyanalytical re- bookanalyzes new development in Rus- done"through their personal connections. port on politics, business and the sian accountingand auditingand also Thus donorshave lent resourcesand economyin China.To order: Orbis Pub- describesmajor shortcomings of the tax legitimacyto communist-styleorganiza- lications,L.L.C., 3201 New Mexico Ave., system-andcollection. tions,undermining attempts to buildin- N.W, Suite249, Washington, D.C. 20016, dependent institutions and fomenting UnitedStates, tel. 202-237-0155,fax 202- GuodaSteponaviciene and Ramunas resentmentagainst the elitecliques that 237-0596,E-mail: [email protected], Vilpisaukas, A Survey of Macroeco- benefitted. Intemet: http://vww.orbis.pub.com nomic Variables in Lithuania 19971 1998,Lithuanian Free MarketInstitute, Educationfor All? Fifth regionalRe- "Countdown" Newsletter Vilnius,1998, 119 p. port of the UNICEF International http:llwiiwsv.wsr.ac.at/Countdownl

* TRANSITION,October 1998 C 1998 The World Bank Informationabout a fast-developingEU Bib11h of Articles database-already 1500 bibliographical POLDuiographiyofSelected Arile units,more than 300experts and nearly 200institutions are searchable in "Count- PostsocialistEconomies efits: The ChangingNature of Non- down".It willinclude, in additionto the 15 employment Subsidies in Central EUcountries, data about the future mem- Exeter,J. ThePost-communist Transi- and EasternEurope. Empirical Eco- bers.The main partnerin collectinglit- tion:Pattems and Prospects.Finance nomics (Austria);23, No. 112:31-54, eratureon eastem enlargement published and Development,A QuarterlyPublica- 1998. in the EU countriesis the GermanInsti- tion of the IntemationalMonetary Fund tutefor EconomicResearch (DIW, Ber- (Intemational)35:26-29, September1998. Flanagan, R. J. InstitutionalReforma- lin). It is expectedthat the Institutefor tion in Eastern Europe.Industrial Re- Economicsand Finance,University of FiveYears of Reform:A BriefRetro- lations (United States)7:337-57, July Parma,taly, and the DepartmentofSn- spective.IDS Bulletin/University of Sus- 1998. ternathonaland European Economic Stud- sex, Instituteof Development(United ies,Athens Universityof Economicsand Kingdom)29:10-16, July 1998. Holzmann,R. MarketOpening in East- Business, Greece, will also join the em Europe:The Asymmetry of Trade project under the auspices of the Gorton, G. Banking in Transition AdjustmentofOECD.Aussenwirtschaft Commission's INTERREGIIIC initiative. Economies:Does Efficiency Require (Switzerland)53:257-87, June 1998. Information:'Countdown" project man- Instability?Joumal of Money,Credit ager:SandorRichter, Vienna Institute for and Banking(United States) 30, Part Jaruga,A. PolishPublic Sector Ac- ntationalp wVVwc) Economic Studies 2:16211-55,August 1998. counting in Transition: Evidence http:Avww.wiiw ac.at/,Oppolzergasse 6. From The Mid 1990s. FinancialAc- 1010Wien, Austria, tel. 431-533-6610-Transition To What? RestartingDe- countabilityand Management(United 25 fax:431-533-6610-50,E-mail richter velopmentAfter Communism.IDS Kingdom)14:105-21 May 1998. @wsr.ac.at Bulletin/Universityof Sussex,Institute of DevelopmentStudies (United King- EnergyFrontiers, Newsletter Jones, D. C. Work Incentivesand dealing dom)29:1-83, July 1998. OtherEffects of the Transitionto So- with energyand poweropportunities in cial Assistance in the Transition EasternEurope and the CIS countries. Centraland Eastern Europe Economies:Evidence From Bulgaria. EmpiricalEconomics (Austria) 23, No. Comingissues overview of the Aimr, K. Centralbank Independence 112:237-61,1998. azakhstaniPower GenerationIndustry, in the Baltic Countries. Suomen EIBFinancing in CentralEuropean Coun- Pankki:Review of Economiesin Tran- Asia tries for the Powerand EnergySectors sition(Finland) No. 4:[5]-34,1998. Bosniaand Herzegovina Energy Sector, China'sEconomy: Red Alert. Econo- and EnvironmentalAspects of New Benic, D. Transitionin the Croatian mist (UnitedKingdom) 349:23-26, Oc- PowerPlant Development in Eastern and Economy:Some Early Experiences. tober24-30, 1998. CentralEurope. Politicka Ekonomie(Czech Republic) To order: 13555 Bishop's Court, 46, No. 1:81-92,1998. Fries, S. Stress Test for the East. Brookfield, Wl 53005-6286, United Banker (United Kingdom)148:18-20, States, tel 414-784-9177,fax 414-784- Bilsen,V. Job Creation,Job Destruc- July 1998. 8133, E-mail: Idiefenbach@diesel tion, and Growth of Newly Estab- pub.com,Web site: wwwdieselpub.com lished, Privatized, and State-owned Payne,B. EmergingMarkets: Evolu- Enterprisesin TransitionEconomies: tion Horizonti, in the East. RISK (UnitedKing- the magazinefor the third SurveyEvidence from Bulgaria, Hun- dom.)11:56-63, June 1998. Toorder: Horizonti, a 33 Gogebashivil gary,and Romania.Journal of Com- Tbilisi,:Georgizo,tel399532Gogebashivil S parative Economies(United States) Pesonen,H. Assessing CausalLink- TbilisiGeorgia, tel.995-32-29-29-55, fax 26:429-45, September1998. ages Between the Emerging 995-32-98-75-04, Stock E-mail:presscenter@ Marketsof Asiaand Russia.Suomen horizonti.org, Internet: http://www. Boeri, T. Long-termUnemployment Pankki:Review of Economiesin Tran- horizonti.org and Short-termUnemployment Ben- sition(Finland) No. 4:[47]-56,1998.

(D1998 The World Bank TRANSITION,October 1998 * Radelet,S. The East AsianFinancial We appreciatethe continuous Crisis: Diagnosis,Remedies, Pros- supportof ourcurrent sponsors: T RANSITION pects. BrookingsPapers on Economic Activity (United States); No. 1:1-90, The WilliamDavidson Institute, Telephone:202-473-6982 1998. Fax: 202-522-1152 Email: [email protected] CIS Ann ArborMichigan, and ResearchAssistant: JenniferProchnow Gray,D. EnergyTax Reformin Rus- AWA Telephone:202-473-7466 sia and OtherFormer Soviet Union Fax:202-522-1152 Countries. Finance and Development, A Quarterly Publication of the Intema- We look forward to establishing simi- tional Monetary Fund (International) lar agreementswith others. Please 35:31-34, September 1998. contact the editor for more details. ______The W orld Bank 1818H Street, N.W Gustafsson,B. The Distribution of Eco- Subscribeto TRANSITION WashingtonD.C. 20433 nomicWell-being in UrbanRussia at Telephone:202-477-1234 theEnd of theSoviet Era. International If you are not currentlyon our subscrip- Fax:202-477-6391 Reviewof AppliedEconomies (United tionlist, beginning in calendaryear 1999 WorldWideWeb: Kingdom) 12, No. 3:361-80,September you may receive TRANSITIONon a compli- http://www.worldbank.org/ 1998. mentary basis by writing to: TRANsriToNis a publication of the World Pilon, J. G. DemocraticTransition in Jennifer Prochnow, Bankand is produced by the Macroeco- Central Asia: An Assessment. SAISAssessment. SAIS The WordWorld Bank, ~nomicsopmentand Research Growth Group. Group ofthe Devel- Review(UnitedStates) 18:89-103, Sum- 1818H Street,N.W., mer-Fall 1998. Room MC3-378, The opinions expressed are those of the Washington,D.C. 20433, USA; authors and should not be attributed in Poser,J. At. MonetaryDisruptions and telephone:202-473-7466; any manner to the WorldBank, to its the Emergence of Barter in FSU fax: 202-522-1152, Board of Executive Directors, or to the Economies. Communist Economies Email:[email protected] and Economic Transformation(United TRANsmoNis published six times percal- Kingdom)10:157-77, June 1998. endar year, in February, April, June, For a free subscriptionto the Russian August, October, and December. Rowland, R. H. Metropolitan Popu- languageversion of TRANSITION,write to: TRANsITONwill be sent freeof charge to lation Change in Russia and the T.NTO wilb .etfeeo hret latiormerChanget Union, 1897aInternational 7 Centerfor Privatization, all subscribersbegining calendar year Former Soviet Union, 1897-1997. Investmentand Management 1999. Post-Soviet Geographyand Econo- 20 EugenePottier Street, 252057, ©98TeItrainlBn o mies (UnitedStates) 39:271-96,May 20Egn PtirStet 525, I998 The International Bank for 1998( Kiev, Ukraine, Reconstruction and Development/The telephone:38044-446-0117 World Bank Soros,G A G7-backed,$50bn Currency or 38044-230-2624; BoardOnlyis Way th fr Russiatofax: 38044-446-8277, All rightsreserved Boardis the OnlyWay for Russiato Email:rootQICPIM.FreeNet.Kiev.UA Manufacturedin the UriitedStates of End Its Crisis.Financial Times (United Amenica Kingdom);p. 10, August 13, 1998.- We are pleased to announcethat Volurne9,Number5 Voropajev,V. I. ProjectManagement startingwith thefirst issuein 1999of October1998 Development for Transitional ournewsletter we will be ableto pro- ISBNO08213-4223-1 an electronicversion to those EconomiesEcoomis(Russian(ussan case asestuy).In-vide study).In- who wishto receiveit by E-mail. ISSN1020-5470 temational Joumal of Project Manage- ment (United Kingdom 16:283-92, Please send your E-mail address to: October 1998. [email protected]. Printed on recycledpaper

* TRANSITION,October 1998 ( 1998The World Bank