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THE NEWSLETTER ABOUT REFORMING ECONOMIES

Public Disclosure Authorized TRANSITION Volume10, Number 4 The WorldBank in collaborationwith The WilliamDavidson Institute August1999 A Changing Development Landscape: Globalization and Localization 19677 World Development Report 1999/2000 August1999 by Shahid Yusuf

WorldDevelopment Report 1999/2000: Entering the 21st Centuryexplores the avenuesfor institutionalchange and catalogues Public Disclosure Authorized themajor issues confronting the worldin the early 21stcentury. These issues include macroeconomic instability resulting from openness,decentralization, rapid urbanization, and climate change. Both globalization and localization will shape the development landscapein the early21st centuryBoth forces have a long,albeit somewhat fitful history The response of nation-statesto these twoforces will determine whether incomes in low-incomecountries converge with those of industrialcountries and whether efforts to eliminatepoverty from tomorrow's world are ultimatelysuccessful. Globalization entered the develop- Organization(WTO). The adoption of com- ment discourse in the early mon rulesto regulatebanking and financial What's Inside 1980s. Now it is common cur- reportinglent further momentum, as did the rency and denotesthe integrationof mar- creation of the World Wide Web and an WhatWent Wrongin Ukraine? 3 kets for goods and factors of production, international movement toward product UnsolvedGovernance in China'sSOEs 5 along with the increasing commonalityof standardslike the ISO 9000.

Public Disclosure Authorized standards and consumer tastes. Starting Migrationin TransitionEconomies 8 in the 1980s many countries began dis- Greaterreceptivity toward FDI and the ease Developmentsin Russia mantlingcontrols on the movementof capi- of transactionsoverlong distances induced * MoneyLaundering Scandal 11 tal and adopting a more favorablestance companies to reorganize their activities, * Conglomeratesand their Future 14 to foreign direct investment(FDI). Declin- slice up the value-addedchain, and distrib- * SurvivalStrategy of 12Oligarchs 16 ing transportcosts and advances in com- ute production facilities across markets. * Reader'sForum: Stealing the State 17 municationsand information technology This spatial diffusion and the widening of tightened the integration of goods and marketsare behindthe proliferationof pro- UNDPReport-Transition's Dark Side 19 capital markets. ductionnetworks, which allows firms to spe- * HumanDevelopment Ranking 21 cialize, focus their research efforts, and Overhaulof Statisticsin Transition Getting Global ... leveragetheir scarcemanagerial and mar- Countries 22 ketingskills. Cross-country production net- The Uruguay Round in 1994 significantly workshave reinforced the impulsereleased WilliamDavidsonInstitute25-31 lowered trade barriers and enlarged the bythe liberalizationoftradeand the removal Women'sIssues in EasternEurope 32

Public Disclosure Authorized gambitof trade liberalizationto includeser- of barriersto capital mobility. WorldBank/lMFAgenda 33 vices,intellectual property rights, agricultural Milestonesof Transition35 commodities,and textileswhile anchoring Even with these changes, globalization New Booksand WorkingPapers 37 the newrules of the gamein the WorldTrade might have remaineda weak force were it Bibliographyof SelectedArticles 43

DevelopmentResearch Group The World Bank M TheWilliam DavidsonInstitute not for a seismic shift toward market- The pull of local identity is manifested Gains and Risks based economies and democratic forms through the followingdevelopments: of government symbolizedby the tearing Globalizationand localizationpromise in- down of the Berlin wall. This rise of politi- * Nation-statesmultiplied from 96 in 1980 creased availabilityand more efficient al- cal participation also feeds centrifugal to 192 in 1998. location of resources,freer circulation of pressureswithin nation-states. knowledge,more open competition, and 0 The processof political and functional improvedgovernance. But there are down- Membershipin the WTO increasedfrom decentralization-pointing towardpartici- sides and risks as well. Globalizationen- 102 countries in 1990 to 134 in 1998. patory democracy-is continuingin large tails greater exposure to external shocks Trade in goods and services rose twice and small states. Half the countries that and capitalvolatility-recently highlighted by as fast as gross domestic product (GDP) decentralized also devolved major func- the EastAsian crisis-along with numer- during the 1990s. By 1998 FDI in devel- tional responsibilities. In many countries ous environmentalconsequences. Mea- oping and transition economies reached suresto decentralizein orderto satisfylocal a net $155 billion-1 6 times larger than in demands can lead to macroeconomicin- 1990.International trade that flowsthrough stabilityand lack of fiscal prudence.On the global production networks is now one- other hand fiscal rules can buttresspoliti- third of total trade. One dark side of glo- cal autonomyby assigningrevenue bases, balization,however, is the rapid spread of 7 responsibilities,and prescribing revenue harmfulsubstances and pollutants. sharing arrangementsbetween the center and localities.Efforts to raise urban living . .. and Localat the Same Time standards could prove elusive if policies cannotprevail over the spread of poverty, Nation-statesincreasingly focus on supra- violence,and squalor. nationalissues such as globalization,which circumscribe their choices. Simulta- Recentstrides in developmentthinking have neously, localization is forcing states to begunto definea pragmaticagenda of insti- take note of subnational dynamics and of Eastern Europe and Central Asia tution buildingand policiesthat exploitthe accommodatedemands coming from the subnationalgovernments evolved follow- gains and containthe risksfrom these two local level. ing the collapse of the earlier autocratic forces.For example,rules for fiscaldecen- regimes. tralizationcan establish the sharing of respon- Localization demands autonomy and a sibilities between central and subnational politicalvoice for regionaland community 0 Urbanizationis continuingby leaps and governments.All change courts risk. The needs. It has many motives,including: bounds.At the turn of the 21st centuryhalf downsideof globalizationand localizationis the world's populationwill be living in ar- starklyapparentfromthe EastAsiacrisis and * Dissatisfactionwith the state's ability to eas classified as urban. As recently as thestate-induced fiscal crises in Brazil.These deliver on developmentpromises. 1975this sharewas just over one-third;by forcesare generatingmuch of the stimulus 2025it may riseto almosttwo-thirds. While behinddevelopment. Minimize the risksand * Strength of local and ethnic identity,re- the rate of urbanization has passed its ensuringthatdevelopment is stable and sus- inforced by education,better communica- peak in the higher-income countries of tainablearetheobjectivestostrivefor.Asthis tions, and the rising concentration of Eastern Europe,the transition is just be- reportshows, the roadto sucha desiredfu- people in urban areas. ginning in Asia and Africa.An increase of tureis pavedwith goodinstitutions. almost 1.5 billion people is expected in * Desire to deepen the sense of belong- urban populationsover the next 20 years. Excerptedfrom an article to be published ing somewherein a world in which global- While the public sector is likely to remain in the IMF's Financeand Development. ization levelscultural differences. the key player in planning urban develop- Shahid Yusufis staff directorof the World ment and providing basic services, part- Banks'DECWDteam, in chargeof prepar- * Sharpening competition among nerships between the public sector, ing the World DevelopmentReport 1999/ subnational units in an open environ- nongovernmentalorganizations (NGOs), 2000 to be published in mid-September. ment, along with the reluctance of richer and private entities have become an im- Website: http.//vww worldbankorg1wdr/2000/ entities to share their resources with less portant source of capital, skills, manage- home.htm; Email:world_development_re- well-off neighbors. ment,and initiativethroughout the world. port @worldbankorg. a TRANSITION,August 1999 ( 1999 The WVorldBank/The William Davidson Institute What Went Wrong with Foreign Advice in Ukraine? by Vira Nanivska

Reformin Ukrainehas been greatlyhampered by its government'slack of institutionalcapacity for policymaking.The reform processwas conceived, designed, and guided by donors.So whatwent wrong? Somehow the political will to go the"Western way" did not manifestitself in concretepolicy decisions. The governmentlacked the institutionalcapacity to make radicalpolitical choices.To fix whathas already gone wvrong, Westem technical assistance must be reassessedand shifted to enable Ukrainians to initiatetheir own institutional capacity building.

A fterUkraine gained independence another, and the governmenthas been Duringthe Soviet period the Ukrainian gov- in December1991, the general boggeddown in puttingout fires. ernmentdid not haveany realgoverning /A view was that it had greateco- responsibilities;rather, itwasfullyengaged nomic potential.Already blessed with Whilereformists did not havethe neces- in thedistribution of resourcesand the di- well-educatedpeople, abundant natural saryskills, experience, or resourcesto de- rectmanagement of a huge,country-sized resources,relatively well-developed in- fendtheircourse, well-organized opposition productionline. No policy formulation was dustry and agriculture,Ukraine's geo- groupsrapidly attracted financial resources necessary-alldecisions were made by the graphicallocation in the heartof Europe andretained social support by successfully CentralCommittee of theCommunist Party. wasalso advantageous forworld trade. using familiar Communist slogans. The Ukrainiangovernment's role was to executethose orders. LoweringHigh Expectations Burdenof the SovietLegacy But afterthe collapseof the totalitarian Insteadof reachingthis great potential, Theintemational community tends to believe regime-and inorder to functionproperly however,Ukraine endured one of the thatlack of politicalwill by Ukraine'spresi- in the newdemocratic arena-the Post- world'sworstdepressionsin modernhis- dentandgovernmentistheuniquecauseofSoviet Ukrainiangovernment was ex- tory.Even among the struggling countries theinadequate reforms and economic strat- pectedto justify its decisions,predict their of theformer Soviet Union, Ukraine stands egy.This ignores the other reason: the gap consequences,and prove why theywere outas havingone of the longest and deep- betweenthe design of foreign technical as- betterthan the alternatives. Analytical and est periodsof economicdecline-one last- sistanceprograms and the institutional real- politicaljustifications should have been ing for nearly nine years and with a ityincountriesoftheformerSovietUnion.presented to win publicsupport. But the contractionin GDPof morethan 60 per- governmentmachine was unable to cope cent. For a long time internationaldonors be- with the challengesof transformation- lievedthat the post-SovietUkrainian gov- neithersubstantively (what to do?) nor The effectof this economicdownturn on ernmenthad both the mandateand the managerially(how to makeit happen?). the peoplehas beensevere. Most Ukrai- capacityto make reform decisions. Donors Evenduring the presentreform process, nianslive on less than half the income of a believedthat oncethe Ukrainiangovern- nonew capacities to fulfillsuch tasks have fewyears ago. At least30 percent-and mentwas advised it wouldtake the lead in beendeveloped. perhapsup to 75percent-of families now reformingeconomic and social institutions. livebelow the poverty line. Sickness from Theyfurther believed that once state con- The governmentalso lacksthe abilityto preventablecauses is rising,death rates trol was removedand Ukrainehad been effectivelycommunicate reform to the areclimbing, life expectancy is falling,and giventhe rightrecommendations, civil so- Ukrainianpeople. The basicprinciples of thepopulation is shrinking. cietywould automatically become active a marketeconomy and the rationale for re- and independent,and enterpriseswould forms haveyet to be explained,nor has Poorpolicy decisions and the lack of a cooperatewith foreign investors following anyfuture prosperity been linked to the suc- sound economicstrategy have exacer- generallyaccepted business rules. Given cessor failureof thesereforms. Voucher batedthe economicdecline in Ukraine. theseassumptions, donors saw their role privatization,for example,was promoted Whilethe president and government have solelyas advisingthe governmenton re- as a liberal-socialistequity measure aim- articulatedaclear, medium-term economic formsand supporting the transition finan- ing atthe "fair redistribution of stateprop- policy,its implementationbears little re- cially.However, the government lacked the erty."However, those not involved in private semblance to its vision. As a result, skillsneeded to fulfillits newrole in a mar- business-including public servants, Ukrainehas stumbledfrom one crisisto keteconomy. teachers,doctors, pensioners, and sol-

(D 1999 The World Bank/The William Davidson Institute TRANSITION,August 1999 m diers-did not see the benefit from the been on European integration. In these sions in the presence of opposition and changing ownership of shops and facto- countries institutions were developed to freedomof speech.Market forces, embed- ries and thereby did not become allies of allow integrationinto the EuropeanUnion ded in people's vested interests,thrive in reform.Thus there was no publicpressure (EU). Togetherwith their Western coun- Ukraine. Private initiative is far ahead of to introduce transparentbankruptcy pro- terparts, government officials in Central regulatory framework, and a "shadow cedures. Europeadjust their institutionsto EU stan- economy" makes up 60 percent of GDP. dards, which is stipulated in technical The problemlies in the reformdesign. This Ideally,the institutionalmechanism of the assistance projects. design did not accountfor the Soviet insti- Ukrainiangovernment to carryout reforms tutionallegacy and for the marketbehavior should include: In the former Soviet Uniontechnical assis- of people who instinctivelymake money tance has aimed at consulting, advising, whereverpossible and who are unwillingto * Employingqualified experts for profes- and sharing information, not institution wait for the proper and correct legislation sional policyanalysis, especially research building.The first projectof publicadmin- or propeduresto be in place. on the possible short- and long-termcon- istration reform in Ukraine started in late sequences of suggesteddecisions. 1997-compared to 1991 in Poland. Ukraine,therefore, needs to build on ex- isting societal forces instead of fighting * Evaluatingthe public costs of ignoring Consideringthe overall high level of edu- them.The internationaldevelopment com- those decisions and of reinforcingthem, cation,the Ukrainiangovernment has few munityneeds to advise on the reform pro- and comparing these decisions with de- specialistswith the knowledgeand exper- cess as a special policy craft, both in fined goals. tise necessary for government work in a concept and implementation. Projects democratic, open, and transparent soci- should be designed to facilitate new gov- * Managing change by establishing a ety. Most public servants lack the skills ernmentfunctions. departmentof reform managementthat is neededto give strategicadvice to the gov- able to formulatereform strategy,differen- ernment. Training programs must also be restruc- tiate processfrom substance,identify driv- tured so that Ukrainianscan initiate their ing forces and opponents of reform, Technical assistance in Ukraine has fo- own development. Ukrainian partici- develop action plans, and build political cused on advice rather than on teaching pants need substantive training, includ- supportthroughout the country. Ukrainiansto developand formulatepolicy ing continuing study programs after advice. Frequently,foreign consultantsdo returning from abroad. For now these * Putting organizational procedures in not promote the transfer of knowledge overseas programs do little more than placeto provideextensive supportfor gov- because they are expected to provide provide sightseeing tours. Technical aid ernment reform policies,including an offi- advisory service. Thus they are opposed also needs to be aimed at helping Ukrai- cially structuredsystem of communication to guiding, consulting, and supervising nian institutions to ask the proper ques- with the Parliament,as well as procedures Ukrainiansto do the same.As a result, all tions, find the answers, and thus be and documents that fulfill the principleof parties are frustrated-the foreign advi- self-supportive in the decisionmaking governmenttransparency for the public. sors because Ukrainians do not follow process. their advice,the Ukrainiansbecause they Donors' Miscalculations were not helpedto deal withtheir problems. Vira Nanivskar is Director of the Inter- Ultimately,the government is unable to national Centre for Policy Studies Foreign technical assistanceto date has evaluateforeign advice-let alone imple- (ICPS), Kyiv. ICPS is a nongovernment not helped to develop Ukraine's analytic ment it. Likethe fictional character Baron research organization operationally fi- competenceinside and outside the gov- Munchausen,the Ukrainiangovernment is nanced by George Soros' Open Society ernment.Recommendations offered to the expectedto drag itself by its own hair into Institute. ICPS conducts independent governmentby groups of foreign experts a new role. research and organizes dialogue be- who conduct their own research cannot tween the public, the government,NGOs, directly be used with any great or lasting More Training,Less Advising foreign experts, and the media. Its peri- effect on Ukrainianpolicymaking. odical Quarterly Predictions provides On the contrary, Ukraine has paid a high economic commentaries and forecasts. Why was the approach more successful price for early democratization,which has ICPS produces and disseminates the in the Central Europeancountries than in not been matched by the government's Russian language version of our Tran- Ukraine?In Central Europethe focus has institutional capacity to take reformdeci- sition Newsletter.

* TRANSITION,August 1999 (C 1999 The 'World Bank/The William Davidson Institute How to Better Manage China's State Owned Enterprises? by Weian Li, Lidong Wu, and Yashuang Zhang

Beiing, a city withan unprecedentedconstruction boom, was the location of the"4th Annual International Conference on Transi- tion Economies"in lateJuly, sponsored by The WilliamDavidson Institute of AnnArbor, Michigan, the London-based Centre for EconomicPolicy Research (CEPR), and the NationalCenter for EconomicResearch at TsinghuaUniversity, Beijing, in coop- erationwith the WorldBank and the FordFoundation. The conferencecovered a broadrange of transitionissues, including the experiencesof Centraland EastemEuropean transition economies and the lessonsgained that can be usefulfor China's scholarsand policymakers.The followingarticle analyzes the corporategovernance dilemma of China'sstate-owned enter- prises.Incorporation and mixedownership (through selling stocks to banksand otherinvestors on the stock exchange)can createfavorable conditions for introducingmodern, market-driven corporate governance in China.Transition newsletter will comeback to the conferencedebate in thefuture issues. T he corporate governance of were formally separated under formal againstthe powerof theenterprise man- China'sstate-owned enterprises contracts(managers gained some au- ager. is graduallychanging from admin- tonomyand becamemore motivated to istrativelycontrolled to market driven. In the increaseproduction), but the administra- Theseprerequisites are notmet, for a va- highlycentralized planned economy, gov- tivenature of governancedid notchange. rietyof reasons: emnmentand enterprise functions were not The government-the externalgover- separated.Businesses were government nancein thissystem-controls personnel * Duringthe process of broadeningenter- affiliations,or state-ownedenterprises, affairs,appoints and evaluates manage- priseautonomy, the government stays out andlacked the necessaryrights and vital- ment, and scrutinizesoverall business of an enterprises'affairs and real control ityof anindependent entity. As a result,en- performance.The internal governance in shiftsto the enterprisemanagers. Due to terpriseswere inefficient,with elusive this systemis a structureof checksand anasymmetry of information,the govern- performanceresponsibilities. Reforms balancesamong three power centers: mentisunable to determine whetherexter- startingin thelate 1970s were not enough nal factorsor a manager'ssuccesses or to curethe ailing state enterprisesor to 0 Enterprisedirectors or managerstake failurescause a certainoutcome. Reward- allowan efficient governance mechanism chargeof the dailyproduction and man- ing or penalizingmanagers is biasedand to develop. agement. inefficientat best. Supervisionof enter- prisesneeds to be made more efficient, but While the meansof governmentcontrol * The secretaryof the CommunistParty bringingthe enterprise back under full gov- changed-from physicalindicators to fi- Committeeis responsiblefor the person- ernmentcontrol is nota realisticalternative. nancialregulators-the authoritieswere neland the party affairs, as wellas super- still unwillingto giveup supervision of the visionof theenterprise operation. * Enterprisedirectors and managers pur- enterprises'activities, including invest- suepersonal interests-often this means mentpolicies, production mixes, and long- 0 TheWorkers Council represents staff in maximizingtheir own economicgains. termdevelopment plans. The government, theenterprise management. Withoutadequate supervision, adverse as owner,made the decisions,and the selectionand moral hazards are the result. managersor factorydirectors executed Thisgovernance pattern is efficientonly if: thesedecisions. Managers of the enter- * Sincethe partysecretary and the fac- prises'day to day operationstherefore * The governmentexercises effective su- torydirectors or managershave common lackedincentives for preservingand in- pervisionover the enterprise. interests,collusion among them is hardto creasingenterprise value. avoided-often,the factory manager and * Theenterprise director or manageris a the partysecretary are the sameperson. Who ControlsWhom? personof highprinciples. Supervisionby the Workers Councilis even moreineffective since the staff de- With thecontracting-outsystem,theown-* The partysecretary and the Workers pendsonmanagersfortheirsalaries,wel- ershipand management of theenterprise Council provide checks and balances fare,and promotions.

C) 1999 The World Bank/The William Davidson institute TRANSITION,August 1999 Clearly, a new governance pattern is by the authorities,and to protect the inter- 0 Worker participation in management needed in China, but it needs to be ap- ests of the minority shareholders. This should be encouraged.Participation en- plied under the right conditions. Selected more market-drivencorporate governance sures the sustainabledevelopment of the enterprises are experimenting with the structurestill suffers from severalproblems: enterprise,binding the future of the firm to shareholdingsystem. However,two prob- the well-beingof its employees.Likewise, lems are already apparent. First, due to 0 The shareholders' control in many en- the position of worker directors and their the special characteristicsof listed com- terprisesis ratherlimited. Their major role participationwith the boardof directorsand panies in China, stocks are concentrated is to decide how much of the dividends board of supervisorsshould be regulated. in the handsof state authoritiesorof legal should be distributed each year. Share- Worker directors and worker supervisors entities approved by the state. Majority holders do not select members of the shouldbeselected bytheWorkersCouncil. stock owners-with a huge concentration board of directors, which in many com- of shares-thus have unmatchedpower to panies is established before the share- 0 Supervision of enterprises should be dominateshareholders' meetings, boards holders' general meeting.Often directors strengthenedby introducingoutside super- of directors,and managers.Thus the for- are government officials who had previ- visors such as auditors and accountants. mal separation of power is illusory. Sec- ously managed the company from their At present, most supervisorsare chosen ond, enterprisegovernance should provide relevant ministries. The government ap- from the ranksof corporatemanagers. for an efficient decisionmaking process. points the chair of the board of directors The newsystem does littletoimprovethe and the general manager.In some prov- * Theindependenceofnonexecutivedirec- process,although it appearsto be tightly inces local authorities simply remove di- tors-experts, scholars,or experienceden- structured and well coordinated. The rectors and the chair if unsatisfied with trepreneurs-whose participationis invited shareholders' general meeting is pre- them. Thus even listed corporationsare by the shareholdersshould be reinforced. ventedfrom serving its properfunction by controlled more by the government than the enormouspower of the boardof direc- by the shareholders.A standard mecha- Needed: Capital Market tors,while the second-tierboard of super- nism has yet to be established. visorsis too weak to have much influence. An effectivecorporate governance mecha- Despite this formal system, externalgov- nismassumes the existenceof a function- Limited Shareholders'Role ernance mechanismremains ineffective. ing, efficientcapital market. China's capital The government is unableto properlysu- marketis rife with speculativeactivities due A recentfirm-level surveyfound that in 85 pervise enterprises because asymmetric to ambiguitiesin regulations,loose super- percent of state enterprises the general information provides ample room for in- vision,and lack of a modernenterprise sys- manager has assumed full responsibility sider control. tem.Strong measures must be takento get under the direction of the board of direc- the stock marketback on the right track. tors (75 percent) or the board of supervi- Internal governance is also weak. Most sors (10 percent), while 15 percent of shareholdingcorporationshavenointer- Managers are important human re- corporationsare either run jointly by the nal supervision mechanisms. Workers sources in modern corporations. The board of directors and the party commit- lack efficient access to the management practice of having government depart- tee (12 percent)-the committeeassum- of a corporation.Supervisors come from ments appoint managers should be ing responsibilityfor decisions-or by the the corporateauditing, accounting, and ad- stopped and a market for high-level man- generalmanager under the directionof the ministrative staffs. This arrangement agers should be established. Intermedi- party committee(3 percent). makes collusion with managers far more ary companies(head-hunterfirms) should likelyand nearlyeliminates anythe chance be established to find individuals with The survey also found that the board of for independentsupervision. In most cor- managementtalent. Managersshould be directors(selected from high-levelexecu- porations the general manager and the selected on the basis of fair competition tives) overwhelmingly dominates the chair of the board are the same person, and markettesting. decisionmaking process, initiating pro- significantly undercuttingthe supervisory posals and participating in discussions. role of the board. The currentbanking system in Chinadoes The worker directors,the board of super- little to improvethe efficiencyof corporate visors, and the ministries have more of a We base our recommended corporate governance.Loans are still allocatedon an supplementaryfunction. Efforts have been governancemodel on the principleof joint administrativebasis, providing little corpo- made to give a greater role to worker di- governance and joint decisionmakingby rate discipline.Assuming that Chinaintro- rectors and "outside"directors, appointed all the interested parties. duces the German or Japanese model of

* TRANSITION, August 1999 © 1999 The World Bank/The WXilliamDavidson Institute the main-banksystem-allowing banksto incorporation,of existingbanks and the es- Business School of Naikai University, accumulatepart of theirassets in enterprise tablishment of new banks, encouraging Tianjin Province, through random sam- shares-reform of China'sbanking system competitionin the financialsector. pling of 300 of the 745 listed companies. should create a new relationshipbetween Weian Li is Dean, Lidong Wu and enterprisesand banksand improvethe ef- *Thesurvey was carried out in 1997,sup- Yashuang Zhang are PhD students of fectivenessof corporategovernance. This ported by the State Committee of Eco- economics at the International Business reformwould require commercialization, or nomics and Trade and the International School, Nankai University.

Corporate Governance in Eastern Europe-A Survey by Oxford Analytica

In the early years of transition, observers spoke of choosing networksamong firms-and among firms, banks, and partsof between different models of capitalism-particularly between the state-compensated for the structuralshortcomings of the Anglo-Saxonstock market capitalismand the German model formal organizationof the economy,keeping the economyrun- of more concentratedownership that permitscommercial banks ning in times of politicalparalysis. These informalnetworks, how- to hold enterpriseshares in their assets. The corporatestruc- ever,have also exacerbated structural shortcomings by bypassing tures that have emergedin practiceborrow elementsfrom dif- regulatorycontrols and allowinganticompetitive links to flourish. ferent modelsof capitalism.A decade of privatization has had different effects on corporate governance. Several problems A prerequisitefor improvingcorporate governance is the use of have emerged: market mechanismsto force underperformingfirms to change managementpractices and failing firms to exit the market.Al- * Crony capitalism. Several countries are just beginning to thoughthe rudimentsof these mechanismsare in place across unravel the webs of crony capitalismthat have been built up as CentralEurope, they have not beenwidely used.The numberof a result of partial privatizationand political favoritism. In par- serioustakeover bids is still small. Shareholderactivism looks ticular, the Czech and Slovak governmentsare trying to undo like a distant prospect,given that supervisoryboards are weak the work of theirpredecessors. By contrast,front-runners of tran- and market supervisionis well belowWestern Europeanstan- sition-like Hungary and Poland-have relativelygood corpo- dards.Regulators have been slow to respondto theseproblems. rate governance, as evidenced by the level of industrial restructuringand competitiveness.However, market supervi- Central Europe'sequity markets have not recoveredto a level sion is still not entirely trusted by investors even in these pre- close to the highs achievedbefore the Asian and Russiancri- ferred investmentdestinations. ses. However,some efforts are being made to improve inves- tor confidence,such as: * Iron triangles.Across Central Europethere is still much to be done to dismantle the iron triangles that have been built up * Legalreforms are being introducedto allow hostiletakeovers. amongfirms, banks,and the state. Soft credits have been pro- Hungaryhas recentlyintroduced a takeoverlaw, endinga situ- vided to many failingenterprises through these links,even after ation in which firms could write "poison-pill"clauses into their privatization. statutesto ward off hostile bidders.

* Managementabuses. Managersand boards are often re- 0 The Czech Republicis reformingits bankruptcyrules so that luctantto cede control,preferring to retaincontrol of failingbusi- they can be used to force market exit. nesses rather than allow foreigners a chance to improve enterprise performance.Also, a general lack of transparency * Abuse of minorityshareholders is being addressedthrough deters investors, especiallyafter revelationsover the past two legislativechange, as in the substantialprotection provisions in- years of the extent of the "tunnelling"used to strip Czechfirms cluded in this year's overhaulof Slovakia'sfinancial regulation. of their assets aftervoucher privatization.Boards are still reluc- tant to give out information,while local accountingstandards Based ona recent report of OxfordAnalytica,the Oxford-based are often well below international norms. Moreover,rules on internationalconsulting firm. Information:OxfordAnalytica Ltd, shareholderliability are frequentlyunclear. At Pasley Tyler, 42 Berkeley Square, London, England, WIX 5DB; Tel: 44171-318-0800; Fax: 44171-409-369; United * Interfirmnetworks. Interenterpriselinks are a key concern Statesaddress: OxfordAnalytica Inc., 1750KStreet,NW, Suite in improvingcorporate governance,particularly among small 800, Washington,DC 20006; Tel:202-872-24 1; Fax: 202-429- and medium-sizeenterprises. At the start of transition,informal 7030; Email: [email protected].

C) 1999 The World Bank/The William Davidson Institute TRANSITION,August 1999 C Ethnic Unmixing and Forced Migration in the Transition States by Tim Heleniak T herecent episode of ethniccleans claimshave come into the open as the Theresponse of many has been to migrate ing andforced ethnic migration in resultof the end of the coldwar and the backto what they perceive to betheir eth- Kosovo is, unfortunately,all too nichomelands. This massive, unplanned, commonamong the transitionstates of and chaoticethnic unmixing has had a Europeand Asia. The emergenceof new negativeimpact on developmentand has independentstates-many resulting from led to increasedpoverty at a time when the breakupsof the SovietUnion and Yu- the states are also transformingtheir goslaviaand the liberalizationof political economiesaway from the centrally planned regimesacross the region-has spawned modelsthey used for decades. a numberof differentmigration streams, manyof themforced. Each of thetransi- With mostof the armedhostilities in the tionstates has become more ethnically ho- formerSovietUnion having died down, much mogeneoussince the beginningof the of internationalcommunity's attention has decadeas a resultof the ethnicunmixing ,: focusedon the repatriation of 780,000 refu- that has beenthe primary,but not sole, ., gees and 800,000internally displaced causeof themigration . peopleand on therebuilding of Kosovo.It shouldbe kept in mind that the conse- ChaoticUnmixing quencesofarmedethnicconflicts lingerlong liberalization that contributed to the after hostilitieshave ended and disap- Duringthe Sovietperiod a tight lid was breakupof theSoviet Union, Yugoslavia, pearedfrom the headlines.Anumberof po- kepton the nationalistand territorial aspi- andCzechoslovakia. As newstates seek tentiallyexplosive situations remain in the rations of various ethnic groups. Sup- to correct these grievancesor assert formerSovietUnion-and elsewhere in the pressedethnic grievances and territorial claims,other ethnic groups are excluded. region-to whichdurable political solutions

Glossary

Internallydisplacedperson (IDP):A person in similarcircum- Refugee:A personwho is outsidehis or her countryof origin stancesto a refugeewith the exception of notcrossing an inter- andis unableor unwillingto avail to the protectionof that coun- nationalborder. More difficult to dealwith because such a person tryor returnthere. Such inability or unwillingnessis attributable is oftenoutside the reach of theinternational community. to a well-groundedfear of prosecution,based on race, religion, InterationalOrganization for Migration (10M): An interna- nationality,membership in a particularsocial group, or political tionalNGO that monitorsthe complexmigration and refugee opinion. movementsand workson governmentalcapacity building in UnitedStates Committee on Refugees:A U.S. NGOthat areasof migrationand refugee legislation. attemptsto findsolutions to refugeeproblems partially through Irredentism: The policyadvocated by membersof an ethnic publicizingthe plightof uprootedpeoples. Compiles the an- groupof reattachinga regionthat was-or thatthey believe nual WorldRefugee Survey. shouldbe-part of the ethnic homelandto the homeland.Usu- United Nations High Commissioner for Refugees allyonly possible when the group is a majorityin the region and (UNHCR):The main UnitedNations body mandated to deal the regionis contiguousto the homeland. withrefugees. The UNHCRand the IOMorganized the Com- Nonrefoulement:The principlethat no personwith a well- monwealthof IndependentStates (CIS) Conference in 1996 foundedfear of persecutionshould be forcibly returned to the to deal with consequencesof the large and complexpost- countrywhere they fear persecution. This is theguideline under Sovietmigration. The WorldBank has played a limitedrole in whichthe international community and other bodies dealing with the workon the conferencethat hasfallen shortof expecta- refugeesoperate. tionsin termsof fund-raisingand other areas.

T PANSITION, August 1999 C 1999 The World Bank/The WNilliamDavidson Inrstitute World Bank Focuses on Conflicts, Refugees, Migration

Todeal with the current proliferation of ethnicconflicts, the Post- Moreelusive are preventativemeasures that the Bankcan ConflictUnit was createdin 1997within the World Bank's So- take in countriesto manageconflict before it eruptsinto vio- cialDevelopment Network. The Bank plays a rolein post-conflict lence.A betterunderstanding of the historicaldimension of reconstructionbased on its comparativeadvantages in aid co- the ethnicconflicts that give rise to violenceand forced mi- ordination,macroeconomic stabilization, infrastructure finance, grationis a positivefirst step. However,no singleset of cir- socialassessments of displacedpopulations, and social sec- cumstancesleads to ethnic or intrastateconflict and population tor restoration.The Bank,along with the EuropeanCommis- displacement.There is an ongoingdebate about the roleaid sion,is organizingthe internationalcommunity's response to playsin promotingcivil society and goodgovernance. the situationin Kosovo. As a developmentinstitution, the Bankcannot resolve con- Keepin mindthat the Bank is notrelief agency, although there is flicts,nor it is in the Bank'smandate. The Bank'srole is notto oftena humanitarianimpulse to avertevery incident of violent interferein the internalaffairs of a membercountry nor ques- conflictthat causes population displacement. Many of the Bank's tion its politicalorientation and obviouslyhas less leverage procurementand disbursement processes have proven to bea with non-members-keepin mindthat Yugoslaviais a non- stumblingblock in post-conflictrecovery. The Bank's major role member.Promotion of growth,equity, and inclusion-all in- comeslater in the post-conflictreconstruction phase and during cludedin the Bank'smandate-can also go a longway toward returnto normaloperations. To that end,the post-conflictfund conflictmanagement. In additionto infrastructurereconstruc- wascreated to bea quick-disbursinginstrument through which tion, whichis at the core of the Bank'srole, moreattention analysisand piloting of reconstructionactivities can be carried needsto be paid to sustainabilityissues. The SocialDevel- outwhennormal Bank borrowing is notpossible. Two grants each opmentStrategy Paper for the Europeand Central Asia re- $1 millionfrom thefund havebeen awarded to assistAlbania gion thatis beingdrafted lists migration and ethnic conflict as withthe refugees who have fled there from Kosovo. oneof themain social development issues-and challenges. haveyet to befound.Anumber of "pseudo the Europeand CentralAsia regionhas ranging from 50 percent in the three states"exist-regions within sovereign increasedfrom eight at the beginningof Transcaucasusstates and Tajikistanto statesthatoperateautonomouslybutarenot the decadeto the current27. Only five barely1 percentfromUkraine and Belarus. recognizedas independentby any other statesin the region remain within the same Whilethe returnmigration of nearly3 mil- country.These include theTransdniester re- bordersas at the beginningof transition. lion Russiansis considerableand has gionof Moldova,Nagorno-Kharabakwithin Most of the new,or newlyindependent placedgreat strains on the depressed Azerbaijan,the Chechen republicwithin Rus- statesare the homelandsof a titulareth- Russianeconomy to absorbthem, most sia,the Ossestianand Abkhazian regions nic groupwho have the goal of making Russiansoutside Russia were reluctant to in Georgia,and the Kosovo region within Yu- state and nation consistent,often with migrate.Russia realized the potentialbur- goslavia.In all ofthese areas the push for greatlyexaggerated or conflictingclaims denof absorbing 25 millionRussians from autonomyor territorialclaims has resulted of homeland.This has ledto a numberof non-Russianstates, and discouraged mi- in ethnicviolence and population displace- episodesof forcedmigration, as well as grationwhile helpingthe expatriotsfeel ment.The resolution of these conflicts may noncoercedethnic unmixing. Little of the partof the Russiannation by persuading causefurther displacement. bloodyethnic unmixing of the formerSo- the statesto allowdual citizenship. Thus, vietUnion has been directed at Russians; with a few exceptions,most of the non- Asa developmentinstitution, the World Bank however,the largestnumber of Russians Russiansuccessor states are embarking hasan obvious, albeit uncertain, role to play havemigrated back to Russiafrom areas onstate building with significant minorities inthe ethnic unmixing and forced migration whereethnic violence is thegreatest. of Russiansand other nationalities. takingplace across Europe and Asia. In the new statesof the former Soviet The mosaic of nationalities in the MoreStates, More Migration Union,much of the increasein ethnicho- Transcaucasusregion has been the area mogeneityhas been due to the returnmi- of some of the mostviolent and severe Migrationhasalwaysplayedaroleinstategration of morethan 10 percentof the ethnic unmixing in the former Soviet buildingorunbuilding. Thus, it shouldcome Russiandiaspora population from the Union.The conflict between Armenia and as no surprisethat there has been so non-Russianstates. The rate of return AzerbaijanovercontroloftheArmenia-ma- muchmigrationasthenumberofstatesin among the states varies considerably, jority enclaveof Nagorno-Kharabakhas

(©1999 The World Bank/The William Davidson Institute TRANSITtON.August 1999 a causedan estimated350,00OArmenians to of the Muslim-CroatFederation of Bosnia zenshipor introducingdiscriminatory laws. leaveAzerbaijan,of which260,000 went to and Herzegovinaand the Serb Republic The majority of states, however,are trying Armenia,and 167,000Azeris to leave Ar- Srpskacontinue the difficultrebuilding pro- to walk the fine line between creating a meniaforAzerbaijan. An estimated550,000 cess there. The recent end to hostilitiesin homelandfor membersof the titularnation- internally displaced people remain in Kosovohas allowed a tentativestart to the ality while also accommodating minority Azerbaijan.The separatistmovements in repatriationof Kosovarsand to the recon- nationalities. Kazakhstan, with its large Georgia by the Abkhaz and Ossetian re- structionof infrastructure.Still, the Serbian Russianpopulation, is a good example of gions has caused an estimated275,000 governmentviews Kosovo as part of the this balancedpolicy. displacedpeople. At its peakthe civil war in Serbianhomeland. Tajikistan,which lastedfrom 1992to 1997, A number of factors dictate the level of causedthedisplacementof 900,000 people, The transition states of the Europe and migration and the degree to which it is 700,000of them internally.By mid-1997a CentralAsia region contain about 7 per- forced. These have to do with the charac- peaceagreement had been reachedand a cent of the world's population but have teristics of the diasporagroup, the home- majorityof those displacedhave returned. about 15 percent of the world's refugees land, and the host country. Eventwo of the relativelypeaceful and pros- and internallydisplaced people. Other es- perousBaltic states-Latvia and Estonia- timates place the region's share of refu- 0 Size, history, rootedness, and geo- havebeen taken to taskby the international gees and displacedpeople at closer to 30 graphic concentration characterize the communityovertheir exclusion of largeRus- percent.In most casesthe conditionsthat diaspora group. Russian populations in sian-speakingpopulations through restric- caused these population displacements non-Russianstates tend to be large and tive citizenshipand languagelaws. are unresolved and the affected people concentrated,usually in the capital cities. remain in a state of permanentmigration. Most were born in these non-Russian The four-year war in Bosnia and current states. dispute in Kosovoare ratherwell known. Displacementand Consequences At the end of 1997 more than 800,000 * A homeland's attitude toward the Bosnians remained internally displaced. During the 1990s some titular members diaspora community affects migration at More than 600,000 Bosnian refugees re- of the newly independentstates tried to bothformal and informallevels, which trans- mained outside the country and 40,000 correct what they perceived as historical lates into how much of a pull factor it be- refugees from Croatiawere in Bosnia.An wrongs by giving preference to their eth- comes. Somestates such as Kazakhstan intentionallydecentralized state consisting nic group, often by arbitrarilydefining citi- and the Balticsautomatically grant citizen-

Russia's August Crisis Changes Migration Patterns

The August 1998 financial crisis in Russia had an immediate This same downwardnet migrationtrend and overall migration effect on migration patterns in the country.The long-term im- turnover continued during the first eight months of 1998,with pact of the crisis may have an even deeper impacton the age the numberof Russiancitizens who left decliningby 15 percent and occupational composition of the country because of the as compared to 1997. Following the August financial crisis, selective nature of migration. Since the breakupof the Soviet during the last four months of the year the number of people Union at the end of 1991, Russia and the other two Slavic leavingincreased by 18 percentand there is evidencethat pres- states, Ukraine and Belarus, have been the only former So- sures for further emigrationfrom the country persist. Emigra- viet Union (FSU) states where more peoplehave arrived than tion to Israelfrom Russiadoubled in the first two monthsof 1999. left. Russia has received about 5.5 million legal migrants be- There is also evidencethat many of the country's young,who tween 1992and 1998while 2.5 millionhave left over the same have been recently educated in new professions, are seeking period, resulting in a net populationgain from migrationof 3.0 to leave for better prospectsabroad. million.The net migrationwas about250,000 in 1992,Russia's first year of independence,building to a peak in 1994at more The number of those migratingto Russia from the other FSU than 800,000. Net migration has declined considerablysince states seems to have been also influencedby the financial cri- then to 300,000 in 1998. Since 1994 Russia has had positive sis. Many Russiansand Russian-speakersin other FSU states net migrationwith all other FSU states. Migrationfrom Russia have postponed migrating because of the political and eco- to outside the FSU (mainly Germany, Israel, and the United nomic turmoil in Russia.The number of people migratingfrom States) has been rather steady between 1990 and 1997 at Russia to Kazakhstanactually increasedin 1998,the first such about 100,000 peoplea year. increase in the 1990s.

E TRANsITION,August 1999 ( 1999 The WorldBank/The William Davidson Institute ship to membersof the titular ethnic group noritiesand the degreeof social inclusion placed remain in limbo,wanting to return anywherein theworld.Others, such as Hun- have beenamong the largestfactorsinflu- to their homelands or integrate into the gary, took a more neutral approach to its encing eithercoerced or noncoercedeth- residentsocieties, but are baredfrom do- diasporamembers. Hungary, while recog- nic unmixing. ing so. At the sametime, a countryunable nizingthat Hungariansliving in neighboring to handle its large minorities, and which states are part of the Hungariannation, is This recent and ongoing populationdis- forces them into uncertain status, will not readyto offernonresident citizenship- placementhas negativelyaffected social sooner or later be destabilizeditself. this isdone to preservegood relationswith developmentin the regionby increasedun- those borderingcountries that were estab- certaintyamong those affected,fragmen- Tim Heleniak is in the World Bank's De- lishedin the ruins oftheAustro-Hungarian tation of social relationships, loss of velopment Data Group (DECDG). He re- empire, inheriting millionsof Hungarians. livelihoodand savings, increasedpoverty, searches and writes on internal and Germanyand Israelaretwo homelands that and necessary adjustments to new sur- internationalmigration in the Europeand havegreatly affected migration patterns in roundings and new social institutions. CentralAsia region. This article is based the region by inducinga mass migrationof Many migrantshave beenforced to make on the author's own work and selected Germanand Jewishpopulations. difficultadjustments. Urban Russians from papers presented at the conference

the non-Russianstates, for example,have "Diasporas and Ethnic Migrants in 2 0th * As previouslymentioned, the character- beendirected to live in rural areasthat they Century Europe" held May 20-23, 1999, istics of the host nation toward ethnic mi- are unaccustomed to. Many of the dis- Humbolt University,Berlin, Germany.

Foreign Loans Diverted in Monster Money Laundering? The Mafia, Oligarchs, and Russia's Torment

Federal and state authorities,examining possible moneylaundering through the Bank of New York,suspect that Russianorganized crime may have been involvedin skimmingIntemational Monetary Fund (IMF) loans and other foreign economicaid to Russia,the Wall Street Journalreported on August25. Altogether,as much as $10 billion was allegedlylaundered through the bank, the 16th largestasset-holding bank in the United States.A top IMF team startedconsultations in Moscowto pour over Russia'sfinance books.

T he probeinto the routeof IMF loans all, some $350 billion in capital has fled government.After Gaidarwas replaced, toRussia is part of a wide-ranging the country since the fall of the Soviet Kagalovsky moved to Russia's Bank U.S.federal investigation into Rus- Union, with nearly a third of it landing in Menatep,headed by Russianoil and bank- sian moneytransfers that passedthrough the United States,intelligence sources told ing baronMikhail Khodorkovsky. Menatep the Bank of New York (and its Londonof- the U.S. News and World Report. And snappedup a number of enterprisesdur- fices) in the past year or so. investigatorsbelieve that the flow of funds ing Russia's controversial"loan to share" has acceleratedsince the crashof the ruble privatization,including a controllingstake Capital Flight Schemes in August 1998. As Russian companies in the country's second-largest oil com- face bankruptcy,their motivation to pre- pany, Yukos. Menatep failed last year Russia'snational police agency, the MVD, serve assets tends to vanish. amid Russia'sfinancial crisis (see box on conservativelyestimates that $9 billion il- page 16).Kagalovsky is now deputychair- legallyflees the countryeach year.Astudy During an August 21 raid on the Bank of man of Yukos. by the Instituteof Economics of the Rus- New York, U.S. federal investigators sian Academy of Sciences and the Cen- seized the files of Natasha Gurfinkel Investigatorssay Menatepand Kagalovsky tre for the Studyof InternationalEconomic Kagalovsky, a senior vice president who increasinglyare becominga focus of the Relations at the University of Western supervised the bank's East European investigation.Federal and internationallaw Ontario,published this May,suggested that division. She and the bank's vice presi- enforcementofficials say they are looking up to $70 billion disappearedin 1992 and dent in London,Lucy Edwards,were sus- intowhether Kagalovskyhelped construct 1993 alone. Other specialists argue that pended. Ms. Kagalovsky is the wife of a byzantine networkof offshore corpora- total capitalflight in 1994-98 amountedto Konstantin Kagalovsky, Russia's repre- tions that politically connected or mob- morethan $140 billionand currentlyis run- sentative to the IMF in the early 1990s linkedRussians may have used to siphon ning at more than $15 billion a year. Over- under Prime Minister Yegor Gaidar's hundreds of millionsof dollars out of the

(D 1999 The World Bank/The William Davidson Institute TRANSITION,August 1999 F country. Investigatorssay that sum may man Peter Berlin and his wife, Lucy holders. Net sales quadrupledfrom 1994 include part of foreign aid and funds Edwards. Berlin, British corporate to March 1998, net incomejumped nine- pumped into Russia by the IMF to shore records show, is listed as a director of fold, earnings rose by a factor of five, and up the reelingRussian economy. BenexWorldwide Ltd., the company that the future lookedjust as promising.Benex kept several of the suspicious accounts became a distributor of YBM Magnex's Yukos denies that it has been involved in at the New York Bank. Benexmaintained magnets.By March 1998YBM was boast- transfer pricing schemes, but oil industry close ties to Semion Mogilevich the al- ing of plans to become "the world's lead- analysts calculatethat its subsidiariesef- leged head of Solnetsevo, Russia's larg- ing producer of high-energy permanent fectively lost hundreds of millions in rev- est organized crime group. Mogilevich magnets." enue lastyear by sellingits oil to the holding has built a $100 million empire from company at bargain rates.Yukos, like all arms dealing, extortion, prostitution, and But six months later,in June of last year, petroleum companies battered by last other rackets. Before submerging in re- YBM Magnexpleaded guilty to conspiracy year's low world oil prices, itself reported cent years, he lived in Budapest, Hun- to commit securities fraud and has since a $79 million loss for 1998.A deal earlier gary, but is thought to have moved to filed for bankruptcy-lawprotection. In De- this year scattered the ownership of Moscow in recent weeks. Mogilevich al- cember 1998the company's new board, Yukos's two oil production companies legedly is the principal target of a strike composed of outside investors, admitted among six separate offshore firms, from force assembled in early 1998 by the to U.S. authoritiesthat there was evidence the BritishVirgin Islandsto the windswept U.S. government. The force is com- of YBM's criminal wrongdoings,possibly Pacific atoll of Niue in the South Pacific. prised of the FBI, the Treasury Depart- involvinglinks to organizedcrime. YBM had ment, the State Department,the Central faked customerlists showing money laun- Elaborate shell games have become a Intelligence Agency, and the Hungarian dering activity in accounts and business dominantfeature of Russia's post-Soviet InteriorMinistry. dealings in Eastern Europe and the Car- economy. Menatep's own purchase of ibbean.(Money laundering means moving Yukos back in 1996 began with a flour- Asenior U.S.governmentofficialsaidthere ill-gotten gains through a series of bank ish of thinly disguised deception by were "substantial links" between Benex accountstomakethemlooklikelegitimate Kagalovsky. He said "an unknowncom- and YBM Magnex International Inc., a business proceeds). pany called Monblan" had won 85 per- Newtown,Pennsylvania, maker of indus- cent of Russia's second-biggest oil trial magnets.Mogilevich was a founding Earlier this year, the FBI and other fed- company. Menatep later admitted that shareholderof the company.Founded in eral agents raided YBM's world head- Monblan was a subsidiary. 1994by a Russianemigre scientist, YBM quarters in Newtown. The confiscated Magnex,a magnet and bicycle manufac- documents suggest that Russian mob- Secrets of New York Bank Accounts turer,rose from an obscurepenny stock to sters may have usedthe company's East- a multinationalworth nearly $1 billion in ern European operations to launder Also underthe scrutinyof U.S.federal and less than four years. Its numbers aston- millions in dirty money through a web of local investigators is Russian business- ished competitors and delighted stock- related enterprises.

Transfer Pricing-Techniques to Syphon Money Abroad

Underthe transferpricing scheme, or "tolling," Russiancompa- While transfer pricing understatesthe true value of exported nies have been selling productsat below-marketprices to their goods to minimize the amount of foreign currency that is le- offshoreintermediaries. The intermediarythensells the products gally required to be re-exchanged into rubles, an alternative at the internationalprice and the foreigncurrency proceeds never approach is to overstate expenses. enter Russia.This practice has drained billions in profits from Russia'score metalsand oil companiesinto offshoreaccounts. These so-called bogus service agreements involve an off- shore company-often set up by an intermediary that takes Some groups also carry out domestic "transferpricing"-sell- a commission for its efforts-that offers fake consulting ser- ing their goods at below cost to a Russian intermediarycom- vices to its Russian "client." This practice allows money to pany that is controlled by a few executives, thus depriving be exported, while the bills "paid" by the Russian company shareholders of the original company of their profits. These reduce the domestic profits on which it is required to pay tax goods can then be exported at a fair market price. to the authorities.

TRANSITION,August 1999 (C 1999 The WorldBank/The William Davidson Institute The Budapest-based production facility pean and U.S. banks before landing in IMF approved a new loan of $4.5 billion of Magnex was established eight years an offshore account in the Channel Is- for Russia. ago as the property of the Mogilevich- lands that was controlled by a Russian controlledArigo Ltd. Shortlythereafter its commercialbank. All this makes the ongoing IMF-Russia capital increasedand it startedto produce discussions even more complicated. high-tech magnets. (As the Budapest- Some of the accounts Berlin established Moscow's IMF envoy, Mikhail Zadornov, based World Economy Weekly re- at the Bank of New York weren't regular told NTV television that negotiations, ported,the shabby,run-down building that deposit accounts but "micro/CA$H- scheduled to last here until September employed 200 people, one third of them REGISTER" accounts. These accounts 1, will concentrate on the 2000 budget Russian,did not revealmuch aboutthe hi- are typically used by businessesfor cash parameters and Russia's compliance tech production,and hardly reflected the management purposes and are de- with a tight fiscal policy agreed on with $80 millioninvestments in the mid-1990s). signed to make international fund trans- the IMF over the summer.The IMF wants "The products were sent back to the off- fers simpler. Account holders access Russia to aim for a primary budget sur- shorecompany at CaimanIsland and then their accounts and can conduct numer- plus of 4 percent of GDP next year-a reshippedtotheCIScountries."...Atleast ous transactions, including wire trans- figure that excludes Russia's foreign that is what the owners claimed. fers and payment orders in foreign debt payments. Moscow ministers want currencies, via a personal computer. the IMF to lower its sights, stressing that A year ago the Hungariancompany, now chronically poor revenue collection renamed Crumax Inc., decided to start a Were IMF Funds Hijacked? should improve only enough next year to new investment with $20 million in order meet a three-percent surplus. to increase production and build a new The IMF said on August 23 that it was researchand trainingbasis. The Canadian looking into reports of diverted funds but Meanwhile,some members of Congress investorsvetoed the plan. that it had made payments only to the are launching their own probes into the Central Bank of Russia. IMF spokesper- matter.James Leach, a Republicanfrom With the Money, Mogilevich Disap- son Graham Newman pointed out that Iowa and chairman of the House Bank- peared Too underthecurrentstandbycreditlMFmoney ing Committee,is planninga hearing,ten- is paid intothe Russiangovernment's ac- tativelyset for mid-September,on the role Mogilevich disappeared from Budapest count at the New York Federal Reserve Western banks may have played in help- following a Hungarian-Americancoordi- Bank and that these funds can only be ing Russianmoney laundering, including nated raid. Officials confiscated docu- used for repayments to the IMF. Earlier an investigation of whether IMF funds ments and computers in his Budapest credits were paid into either the central have been siphoned. "Russianbanks ap- offices that well-informed sources link to bank of Russia's account at the New pear to be more platforms for insiders the FBI'sNewYork investigation. The Hun- York Federal Reserve, or its account at seeking to spirit moneyout of the country garian authoritiesdeclined to discuss the (Germany's) Bundesbank, and were than intermediaries for domestic eco- results of these raids. The Hungariantax used by the authorities to build up re- nomic growth," Leach said in a press police have extended an ongoing inquiry serves, help finance the budget, or pay statement. At issue is whether foreign into companiescontrolled by Mogilevich. international obligations. theft has been facilitated by self-serving banking practices in the Western world, Investigatorsin NewYork estimate $6 bil- The possible siphoning of funds from includingthe United States. lion zipped through the Benex accounts IMF credits to Russia comes at a time in the short time since authorities began when an audit released this summer by This article was based on reports of re- monitoringthe transactionslast fall. They Pricewaterhouse Coopers shows that porters Michael Allen, Paul Beckett, told the New York Times that the Berlins Russia'scentral bank funneled$1.2 billion Michael Binyon, James Bone, David S. may be involved in one of the largest in IMF moneyin 1996to a firm it controlled Cloud,Alan S. Cullison,Andrew Higgins, money-laundering operations ever con- called Financial Management Co., or and David Listerof the Wall Street Jour- ducted in the United States. Some $4.2 Fimaco, in the ChannelIsland of New Jer- nal, Lacy McCraryof the PhiladelphiaIn- billion passed through a single account sey.The central bank hid that transaction quirer, Gyorgyi Kocsis of the World in more than 10,000 transactions be- from the IMF and later explained it was EconomyWeekly, Budapest,and David tween October and March, the New York tryingto keepthe moneybeyond the reach E. Kaplan of the U.S. News and World Times reported. The cash in question of creditors. The MF has lent about $20 Report. appears to have passed through Euro- billion to Russia since 1992. In July the

© 1999 The World Bank/The William Davidson Institute TRANSITION, August 1999 Curse or Blessing?-Financial-Industrial Groups in Russia by Tatiana Popova Startingin theearly 1990s,Russian industrial companies and banks set up financial-industrialgroups through equity ownership, sometimesthrough cross-ownership arrangements. Their goal was to combinefinancial and industrial capital and managerial know-how,gaining advantage on themarket and through the authorities.Both government-induced and market-driven financial- industrialgroups became important factors shapingthe development of theRussian economy. Their role in theRussian economy has beenmixed: it remainsto be seenwhether they canhelp overcomethe investmentand structural crisis or worsenthe crisis throughinefficient investment policies, monopolistic behavior, and abuseof powerand influence. T he drivefor financial-industrialin- Voucherprivatization, the preferredap- ationof at leastthree financial-industrial tegrationhas beenrooted in So- proach,produced a spectacularrate of groupswith similarprofiles in the same viethistory in a numberof ways: privatization-atleast on paper.Large in- regionalmarket. The 1995law limitsthe * Russia'slarge industrialenterprises dustrialenterprises were transformed into participationof any bankor enterpriseto originatefrom the Soviet era, and bureau- openjoint-stock companies. Due to the a singlefinancial-industrial group. cratstend to preservebureaucratic struc- large numberof new owners,including tures. voucher holdersand labor collectives, A financial-industrial group can be * Managersof industrial enterprises have ownershipand control were scattered and formedaround an industrialenterprise, beenunable to adjustto marketconditions unmanageable.This prevented the emer- researchorganization, -bank, or trade in their approachesto distributionand genceof clearlyidentifiable owners. While firm. However,to qualifyas a financial- saleson domestic and external markets. workersacquired most small firms in trade industrialgroup, participation of a manu- * Russia'sfinancial capital and institutions andservices, the state retained controlling facturerof goodsor providerof services haveoperated in imperfectand fragmented blocksof sharesin manyformally "priva- and a credit organizationis necessary. markets.To combinefinancial and indus- tized"industrial firms. Efforts to privatize Financial-industrialgroups that include trialcapital for investmentsand to restruc- by sellingenterprises through offerings legal entitiesin other CIS countriesare tureenterprises became a necessity. haveyielded meager results. registeredas transnationalgroup. If the fi- nancial-industrialgroup is basedon an in- In 1990-92 Russianmerchant capital- The Russiangovernment thereafter de- tergovernmentalagreement, the group is ism-a mixof commodity exchange, trad- cidedto promotethe financial-industrialgiven the status of an internationalgroup. ing, smuggling,and corruption-created integrationof enterprisesand financial or- thefirst large-scaleconglomerates. Their ganizations,hoping that it would help solve Participantsin a financial-industrialgroup assets increasedas financial markets structuralproblems while avoiding further pursueddifferent interests: enterprises fre- evolved,and the phoenix of financial capi- monopolizationof the economy. quentlysought the umbrellaof a financial- talismwas rebornon the ruinsof the so- industrialgroup to milkthe government or cialist industry. Opinion was split on Russia'slegislation currently covers two banksin orderto stayalive or to acquire whetherthe financialresources of these corporateforms of financial-industrialin- fundsfor coveringtheir operational costs, conglomerateswere channeled into long- tegration: official financial-industrial suchas wages. Banks wanted to diversify termproductive investments based on real groupsand holding companies. A holding theirproperty, including having a directrole needsor aimedmore at gainingconces- companyis definedas an enterprise,in in owningand managing industrial enter- sionsfromtheauthorities. any organizationaland legal form, that prises. possessescontrolling blocks of sharesof By mid-1997 about 130,000 state-owned other enterprises.A financial-industrial The governmenthad its ownstake in the enterprises-overhalf-had beenpriva- groupis definedas a groupof enterprises successof financial-industrialgroups: it tized.Although formal privatization in Rus- andother organizations that pool their capi- hopedefficient groups could take over the sia proceededquickly, it did not create tal, or a groupof companiesthat consoli- roles of investors,managers, and liqui- responsibleproprietors willing to retool dateall or partof theirassets, carrying out datorsof bankruptenterprises. It offered technologies, modernize production, jointinvestments aiming at technological supportto officiallyrecognized financial- manufacturecompetitive products, and andeconomic integration. industrialgroups. Groups of industrialand managetheir enterprises more efficiently. financialcompanies willing to registeras Decisionsto privatizewere essentially Regulatorstried to preventthe formation financial-industrialgroups in principlere- guidedby socialand political goals. of monopoliesthrough envisaging the cre- ceivedstate support and were classified

W TRANSION-,August 1999 () 1999The World BanklThe William Davidson Institute as "official" financial-industrial groups- mation of officially registered financial- groups-still controlRussia's oil, gas, and once the authorities registeredthem. industrialgroups and led to the fast spread metalindustries, employ millions of people, of ad hoc, "unofficial,"financial-industrial bring in the bulk of the country'shard cur- The state supportcan take severalforms: groups. Hundreds of unofficial financial- rencyearnings, and excessivelyinfluence * Afinancial-industrialgroup may receive industrialgroups have been set up by in- Russia's politics. Financial-industrial blocks of state shares. The state can off- dustrial,trading, investment, and insurance groups gained special privileges,includ- set the debt of a member enterprise and companies,which also established their ing tax concessionsand exemptionsfrom grant state guaranteesfor loans, basically own "pocket banks" to provide financing customsduties. for investments. The state also can pro- for the groups, work out investment vide investmentcredits and other financial projects,and take partin the management. Thefuture of Russia'slarge conglomerates support for the group projects. depends on the willingnessand power of * An international financial-industrial The huge financial-industrialalliances- the stateto enforceeffective antimonopoly group can receivefavorable treatment on comprising financial, investment, insur- policies in regulatingofficial and unofficial customstariffs. ance, trading and leasing firms, pension financial-industrialgroups, especially clip- * Afinancial-industrialgroup can be rec- funds, as well as large banks under the ping the wings of the oligarchs. ognized as a consolidated group of tax- controlof oligarchs-have grownout of the payerswith consolidatedaccounting. unofficialgroupings. Even after the shock The author is Economist at the Interna- * Afinancial-industrialgroup can receive of August 1998, these oligarchs-heads tional Fund for Social and Economic the right to define the period of amortiza- of several unofficial financial-industrial Reform,Moscow. tion of equipment and accumulate the funds for its activity. e The centralbank can providebanks that participateand investin financial-industrial Secret to Happiness groups lower reserve requirementsand change other rules in order to increasein- vestments. * The governmentcan financially support _P financial-industrialgroups that participate in federalprograms.

In 1998 the 75 officially registered finan- cial-industrial groups produced about 10 percent of the Russian GDP and em- ployed 5 million people-almost 30 per-__l cent of the industrial workforce. Official

financial-industrial groups-a group of\ '/ about 1,150non-financial enterprises and 160 financial organizations-are concen- tratedin a fewregions. In 1997almost 40 percentof themwere located in Moscow and mostof the restin Siberiaand the Urals region.

The governmentinitially expected a larger * % volume of integration in industry, but it couldn't afford to offer more generous in- centives.Many manufacturerswere afraid "I don't have a summer cottage which can be of the dominance of the banks. Banks on burgierized, a car to be stolen, and their part foundthe rule of restrictingtheir I don't care about stock prices." participation to one financial-industrial group frustrating.This has slowedthe for- Fromthe Hungarianmagazine H6cipo

( 1999 The World Bank/The William Davidson Institute TRANSITION,August 1999 i The Twelve Oligarchs-What Are They Doing?

Since most banks owned by the oligarchs had invested an average of 35 percent of their assets in the GKOs (short-term treasury bills), the GKO moratorium-introduced after the collapse of the ruble in August 1998-effectively made their banks insolvent. As Marshall 1. Goldman, professor of Wellesley College and Director of the Davis Center for Russian Studies at Harvard University, recently pointed out, "in a high-stakes shell game the oligarchs, though considerably poorer, are defying the current economic malaise and remain ahead of the rest. " (The following list is based on his article in the InternationalEconomy).

So,who are the twelveoligarchs and what are they doingnow? 0 Vital Malkin(president, Russian Credit Bank).He has prom- ised foreigncreditors to restructurethe $650million debtowed * Vagit Alekperov (president, Lukoil Oil). Lukoil remains by his bank, but also has shifted assets to the newly estab- Russia's leading oil company. Its 1998 output totaled 53.7 lished IMPEX bank. million tons. Lukoil's credit ratings improved since August 1998. 0 Vladimir Potanin (president, Interros Trading Co./ Oneximbank). The former first deputy prime minister and * PetrAven and Mikhail Fridman(co-chairmen, Alfa group). putative architect of the 1995-96 loans-for-shares scheme, TheAlfa group sufferedless from the August devaluationand faces severe problems. License of Oneximbank has been defaultthan most of its rivals. In October,however, it admitted withdrawn in July, but assets had been shifted to Rosbank, to beingunable to repaya $77 millionsyndicated loan arranged leaving behind debts-$525 million owed to foreign deposi- by Bank of America. Alfa holds on to Tjumen Oil, the group's tors and investorsand $1.5 billion to domestic. Interros as- major corporate investment, besides real estate, securities sets shifted to Interros Prom. The oil company Sidankofaces trading, and cementand chemicalindustries. bankruptcy proceedings together with a number of its sub- sidiaries, including Rosneft. Potanin has lost control over * Boris Berezovsky(founder, LogoVAZ). He hasassets over- the telecommunicationsholding Svyazinvest,having used it seasand closeconnections with PresidentBoris Yeltsin's fam- as collateral for a credit he was unable to repay. The group ily and staff. He maintains operating control of ORT, the still owns 38 percent of Norilsk Nickel, 26 percent of jet- country's leadingtelevision network,Sibneft, a major oil com- engine maker Perm Motors, 26 percent of car manufacturer pany, Logovaz, the Avtovaz auto dealership,Aeroflot airline, Zil, and has holdings in oil, metallurgy, and real estate busi- and the NezavisimaiaGazeta. nesses.

* Vladimir Bogdanov (president,Surgutneftgas). His posi- * Aleksandr Smolensky (chairman,SBS-Agro Bank). SBS tiondid not change.Surgutneftgas, the secondlargest oil com- Agro was closed and temporarily placed under the adminis- pany,produced 35.2 milliontons of oil last year. trative control of the RussianCentral Bank, later saved by a governmentstabilization fund. Smolensky'snew "front"banks * Anatoly Chubais (president,United Energy System). His include Soyuz Bank and First Mutual Society.Smolensky still position is unchanged. heads the SBS-Agrogroup, the parent holdingcompany.

* VladimirGusinsky (founder, Mostbank, Mediamost). His me- 0 Rem Vyakhirev(president, Gazprom).The August crisis diainterests (including the secondlargest television network NTV, strengthenedGazprom and its chief,as the governmenthas be- and the daily newspaperToday/Segodnia) put him in a strong comemore reliant on the companyfor revenue.Gazprom's main positionas the parliamentary,presidential, and regional elec- problemsremain unchanged: collecting domestic payments and tion campaignsget underway.There is talk of himtaking a major negotiatingits tax bills with the government. In 1998 it regis- stake in the telecommunicationsholding Svyazinvest. tered a $2 billion loss. The February appointmentof former Gazpromboss and ex-prime ministerViktor Chernomyrdinas * Mikhail Khodorkovsky(founder, Rosprom/Menatep). His the government'srepresentative in Gazpromwas seen by many moreviable assets have beentransferred from Menatep Bank as a preludeto Vyakhirev'sremoval. to the new Menatep, St. Petersburg.The group owns majority stake at the Yukos oil company;controlling shares in plastics, * VladimirVinogradov(president, Inkombank). Russia's third metallurgy,textiles, chemicals, and food processingcompanies. largestbank was temporarilyclosed, its licensewithdrawn.

* TRANSITION,August 1999 (3 1999 The World Bank/TheWilliam Davidson Institute Readers' Forum Russia's Oligarchs Stole the State Machinery by Stefan Hedlund

In1989 Francis Fukuyama gained issuedunderthe Washington consensus. between nations that are embedded in worldwidefame with his book The Now,however, the time is ripeto setsuch socialnorm systems could safely be as- End of Historyand the Last Man. explanationsaside and to questionin- sumedout of existence. Thefundamental point of thebook was that steadif thereis anyvalid ground at all for theongoing collapse of the communist or- thenotion of universallyapplicable policy Thelong string of discouraging events that deralso meant a final triumph for the West- advice. have playedout in Russiafollowing the ern way of life. Basic liberal values start of "reforms"in January1992 have concerningdemocracy, market economy, Whilethe relativesuccess stories in Cen- broughthome the truth that cultural speci- and the rule of law hademerged victori- tralEurope have had little if anythingto do ficity can be ignoredonly at a price.The ous. withWestern advice and Westernfinan- factorsunderlying the plunder and destruc- cial support,in Russiathe Westernaid tion of the Russianeconomy that have Giventhe realitiesof the time, with the efforthas beenoverwhelming. And Rus- takenplace in thename of "radical reforms" peaceful"revolutions" in CentralEurope sia,as weall know,is nowde facto bank- may be soughtin two differentdimen- andthe growing signs of a pendingimplo- ruptand a pariahon thefinancial markets. sions-both linkedto the institutional triad sionof the Soviet Union, Fukuyama's point The artificiallife support that is beingof- laidout above. wascompelling. Itwould also come to un- feredby the IMF can do little morethan derliemuch of theWestern democracies' postponethis realization. How then could Beginningwith the informal norm systems, attitudestoward the growingnumber of all thiseffort fail so miserably? it mustbe emphasized that a functioning formersocialist states in EasternEurope. marketeconomy presupposes a set of In anenvironment marked by the"Wash- Noone has come closerto an answerthan supportingsocial norms thatserve to block ingtonconsensus," it hadbecome difficult JeffreySachs when he proclaimed that in theformation of collectively irrational indi- indeedto questionwhether a slavishimi- the caseof Russiahe felt like a surgeon vidualstrategies of the prisoner's dilemma tation of the Westernway reallywas the whohad sliced open a patientonly to dis- kind.(See box next page.) rightway for everyone. coverthat everything that was supposed to be therewas not.So what exactly was The "Wrong" Path Dependencyin Is ThereJust One RightWay? missing?Some simple tools out of institu- Russia tionaltheory may help us clarifythat im- Tenyears later we have accumulated suf- portantquestion. Inthe Russiancase, however, social norm ficientexperience to returnto that ques- systemswere veryfarfrom market conform- tion. In the part of Europethat then was The InstitutionalChange Triad ing.Thiswasduenotsimplytotheantimarket cast in a "Soviet"mold and that on the practicesof the Sovietsystem but also to surfacelooked the samefrom Potsdam Puttingit briefly,institutional change is historicalpatterns of behaviorthat are to Vladivostok,widely divergent degrees determinedby the interplay among formal stronglymarked by path dependency. Along of progresshave been recorded. During rules,which may be changedovernight, listofexamples could be advanced but per- transitionto democracies, Central Europe informalnorms, which change only gradu- hapsthe most important is a deeplyrooted racedahead of the formerSoviet repub- allyif atall, and enforcement mechanisms, ruleaversion-drawing actors into elaborate lics, andon the territoryof theformer So- which providelegitimacy for the formal schemesof ruleevasion. viet Unionthe three Baltic states have rulesand may thus help transform the in- outperformedtheir Russian neighbor. formalnorms. Pathdependence in such behaviormay be establishedin twomutually supportive Inthe field of policyadvice there has been The mainthrust of "shocktherapy" was to ways.On theone hand,we haveorgani- a strongdrive to explainsuch divergences changethe formalrules, and to do it as zationalresponses to a widespreadprac- in performanceby pointingto varyingde- quicklyas possible.Tacitly, if notopenly, it tice of rule evasionthat are markedby grees of adherenceto the prescriptions wasassumed that any cultural differences increasingreturns and may, thus, not be

© 1999 The World Bank/The William Davidson Institute TPANSITION,August 1999 A easily dislodged. On the other hand, we functioningmarket economy cannotexist this respectdidlittle morethanreinforce old have the formation of mental modelsthat in a vacuum. To mention one example, patternsof viewing the law as a mere in- serve to rationalize behavior that might there can be no property without govern- strumentin the handsof the rulers. otherwise have been clearly seen as so- ment,and withoutproperty rights there can ciallyirrational. These mentalmodels con- be no market economy. It also bears re- Returningto what was said above about stitute a perhapseven greater obstacleto calling that it was not deregulationbut the sweeping deregulation in a nonmarket the impositionof universal and transpar- ability and willingnessof the state to guar- environment, it must be added that the ent rules of the game. antee contractsand to act as a third party neoliberalcrusade against the state has enforcer that gave birth to the market greatly compounded the damage. Given To recommendand undertake sweeping economyin the NorthernItalian city states that the purpose of deregulationwas to deregulationin an environmentthat was in the 12th and 13th centuries, allow a wide scope for private revenue markedby a whole set of such nonmarket maximization in an environment where attitudesand modesof behaviorwas tanta- In the Russiancase we may find another there were few if any norms againststeal- mount to courting disaster,for the simple powerful path dependencein the view of ing from publiccoffers, the forced abdica- reasonthattherewouldbenoonelefttocare the state as an alien and often hostile tionofthestatefrom its role as enforcerof for the collectiverationality. Those who- force-in a society that never really has commonrules was a sure way of complet- somewhatbelatedly-have beenscolding evolvedany sense of mutualrelations be- ing the disaster. the widespread Russian practice of rent tweenthe rulersand the ruled.For example, seekingserve onlyto underlinewhat really the strongnotions of mutualrights and obli- The grand program of privatization,once shouldhave been obviousfrom the start. gations that marked medieval Western hailed as "the fastest in human history," Europe,and which gave riseto the "West- providesbut one illustrationof this impor- The other dimensionin which we may find ern way" of democracy,market economy, tant point. By now there has been plenty Russianspecificity concerns the role of the andthe ruleof law,have no correspondence said about the predatorybehavior of the state. Again it bears emphasizingthat a in Russiantradition. The Soviet system in Russianoligarchs, but nonehas put it bet-

The Prisoner's Dilemma: Cooperate or Defect? Two people have been arrested separately, and are held in of 40), and confessing is also better if the other person does separate cells. They are not allowed to communicate.Each is not confess (that way, you get to go free instead of having to told the following: serve 30 days). Thus the equilibrium-the behaviorwe expect * We have arrested you and another person for committing to see-is that each playerconfesses. The optimum,however, this crime together. is clearly for each player not to confess,since each player then * If you confess, and the other person confesses,we will re- gets only 30 days. ward your assistanceto us and your sparing us the expenseof a trial by sentencingyou both fairly lightly:to 2 years of prison. With 40 years at stake, confession has nothing to do with * If you don't confess,and the other person also doesn't con- whether one is guilty. It has only to do with what is at risk. The fess,we will not be able to convictyou, but we will be ableto hold prisoner'sdilemma would be a completelydepressing game if you hereand makeyou as uncomfortableas we can for30 days. not for the possibility that cooperationcan evolve in the long * If you confess and the other person does not, we will show run, even thoughin the shortrun it seemsalways betterto strike our appreciationto you by letting you go free. We will then take and run-to defect. your testimony,in which you will implicatethe other person as your accomplice,and put that person in prisonfor 40 years. RobertAxelrod in The Evolutionof Cooperation(1984) con- * If youdon't confess,and the other persondoes, that person's ducted a series of experimentsin which the game was played testimony will be used to put you in prison for 40 years; your repeatedly. Participantswere invited to submit strategies for accomplicewill go free in exchangefor the testimony. playing this game over and over. He found that cooperation * Each of you is being given the same deal. Think about it. could arise if the gamewere played over and over again and if the players involved have a large enough chance of meeting What should each player do? again.

A risk-averseperson will always confess.Confessing is better Based on material from Alannah Orrison, Social Sciences, if the other personconfesses (that way, you get 2 years instead Saddleback College, Mission Viejo, Califomia. e TRANSITION,August 1999 (C 1999 The World Bank/The William Davidson Institute ter than George Soros who said that first Russiansociety by "reforms." If we are to ues may come under renewed threat- "the assets of the state were stolen, and avoid deterministicstatements aboutthe but not from an embitteredRussia. While then when the state itselfbecame valuable Russianinability to change, we must ac- Russia'sefforts at imitatingthe West have as a source of legitimacy,it too was sto- cept that 1991 did provide a window of brought about a halving its GDP,China's len." The real hallmark of the Russian opportunity" when many options were own way has led to a doublingof its GDP! kleptocracy is that the machinery of the open.Against this background,the trag- These are not auspicious grounds on state itself has been hijacked by the edy of Russia's failure becomes even which to argue for the spread of Western kleptocratsand used for personalenrich- greater,for the simplereason that we must values. ment.And this, in turn, was facilitated by now realisticallyexpect that there will be a the reformers' crusade against the state substantial backlash, both against the Stefan Hedlundis professorof EastEu- as an alleged obstacleto free markets. West in general and against the very no- tions of democracy,market economy, and ropean Studies at Uppsala University, The main conclusionto be reached from the rule of law. Sweden. Address: Gem/a Torget 3, Box what has been said above concerns not 514, 751 20 Uppsala,Sweden; Tel:4618- only the massive damage that has been Paradoxically,it may thus turn out that 471 0000; Fax: 4618-106-397; Email: inflicted on the Russianeconomy and on Fukuyama was quite wrong. Liberal val- [email protected] UNDP Report Exposes Transition's Dark Side- The Rise in Poverty, Crime, Disease and Mortality

Countries of the former Soviet Union and Eastern Europe are paying the price for their transitions to a market economy So claims the United Nations Development Programme (UNDP) in a newly released report, Human Development Report for Central and Eastern Europe and the CIS, 1999. The UNDP finds that "a human crisis of monumentalproportions is emerging in the former Soviet Union." The report had several major findings.

uring the transition process, tries of the region-most notably in the Rising Poverty Dgains in freedom have been ac- Russian Federation and most strikingly companied by losses of basic among young and middle-agedmen. The The World Development Indicators economic and social rights. Millions of transition countries of Central Europe 1999, published by the World Bank, pro- peoplein the region are now unemployed have fared much better than those of vides the most recent illustration of the or underemployed. Workers have been Eastern Europe. Most regrettably, this rapid rise in poverty: "Even beforethe cri- driven into the low-paying and insecure reversal of the trend in life expectancy sis, povertywas underminingtransition in employmentof the informal sector.Aver- meansthat several millionpeople who did Eastern Europe and the CIS. In 1989 age cash incomes have plummeted.The not survive the 1990s would have done about14 millionpeople in the former Com- comprehensive system of social protec- so if life expectancylevels from beforethe munist bloclived on less than $4 a day. By tion has crumbled.Many basic social ser- 1990s had been maintained. As a con- the mid-1990s that number had risen to vices now require fee payments or have sequence, an estimated 9.7 million men about 147 million (from 4 percent of the been partiallyprivatized. Public education are "missing" from the region. populationin 1988to 32 percentin 1994)." and health facilities have deteriorated or InArmeniaa householdsurvey conducted have been replaced by private facilities Morbidity levels have also risen. High by the Ministry of Statisticsin 1996found availableonly for those rich enoughto pay. morbidity is characterized by higher in- that about55 percentof householdswere Transition in the region has had other hu- cidences of common illnesses and by poor, based on a minimum consumption man developmentcosts. the spread of such diseases as tuber- basket.In the KyrgyzRepublic, according culosis-diseases that had been re- to the National Statistics Committee, 71 Loss of Life: The Missing 10 Million duced to marginal health threats in the percent of the population had an income past. Particularly serious has been the belowthepoverty line in 1996-which was Loss of life has been the largest single spread of sexually transmitted diseases based on a scale of poverty in which 60 cost of transition, represented by the de- and the rising threat of the HIV/AIDS percent of total income is spent on the cline in life expectancy in several coun- epidemic. minimumfoodneededforsurvival.lnGeor-

©D1999 The World Bank/The William Davidson Institute TRANSITION,August 1999 C gia in 1996 about two-thirds of the popu- wage-and this probably overstated the ment and attendance rates have fallen. lation had an incomebelowthe official pov- real figure because delays in pension Expenditures on nursery and other pre- erty line. In Ukrainethis total was about 50 payments were even greater than wage school facilities have been slashed.In the percent. arrears. Statisticsshow a sharp increase countries of the former Soviet Union, of inequality in Armenia, the Czech Re- more than 30,000 pre-schools have A recent study in Poland shows that 60 public, Hungary, Macedonia, Moldova, closed between 1991and 1995.This has percentofchildren sufferfrom someform Russia, and Slovakia. In many coun- increased the burden of household work of malnutrition.Income-poor families in the tries-including Armenia, Georgia, Rus- on women and diminished their opportu- transition countries have greatly reduced sia, and Ukraine-the share of average nities for employment. their consumptionof milk, meat, and veg- income spent on food rose dramatically. etables and are now relying on cheaper, Despite the rising share of food, daily In most countries the direct and indirect lower-qualityfoods. Iron deficiency is com- calorie intake fell as average incomes costs of school attendance have risenfor mon in the region.The number of Russian and expendituresdeclined. childrenand their families because facili- women sufferingfrom anemia at the end ties, transport assistance, stipends and of their pregnanciesnearly tripled between ShrinkingSpending and Rising Costs subsidies for books, and school meals 1989to 1994.An area study in Uzbekistan in Education have all been cut. Increasingly,the quality showed that about 65 percent of women of schooling has declined due to over- ages 15-50were anemic in 1994.A 1996 Azerbaijan, Bulgaria, and Georgia are crowding, dilapidated facilities, lack of survey in Moldova revealed that 20-50 among the countries where educational heating in winter, underpaidteachers and percentof childrenhad rickets becauseof spendinghas shrunk most. In Bulgariaedu- support staff, and lack of health checks inadequateintake of vitaminD. Infantmor- cationspending has beencut by morethan amongchildren. tality rates have been held down in most 50 percentin real terms.Value amounts of countries,butthenumberoflowbirthweight scholarshipsand the number of students Rising Uemployment and Informal babiesis on the rise, signalingfuture prob- receivingthem have declined.In Moldova, SectorActivities lemsin child mortalityand malnutrition. for instance,stipends forstudents have fallen toaboutaquarteroftheaveragewageand Mass unemployment has been a major Some people have experienced much are nowprovided only to studentsachieving source of social hardshipin the 1990s for greater impoverishment than others. In good academicgrades. Students and their transition countries,with Macedonia and Russia in 1997 the average old-age pen- families have been expected to bear the Moldovahaving extremely high levels(more sion was 34 percent of the average growingburden of schoolingcosts. Enroll- than 30 percent),others with morethan 20

Human Development Indexes: A Mixed Picture

Human development is defined as the process of enlarging Tajikistan,Vietnam, Mongolia, and Laos. But even they perform people's choicesto lead a long and healthylife, acquire knowl- wellwhen it comesto subtractingHDI ranking from real GDP per edge,and have accessto resourcesneeded fora decentstan- capitaranking-showing thattheirHDI position is beenbetterthan dard of living. The UNDP's Human DevelopmentIndex (HDI) their GDP per headranking. The highera country'sHDI ranking, measuresthe level of humandevelopment through three com- the morefavorable is its humandevelopment situation relative to ponents:longevity, measured by life expectancyat birth;edu- its wealth.The UNDPclaims that a good HDI, in part,reflects the cationalattainment, measured by a combinationof adultliteracy legacyof pre-transitiondevelopments-for instance, longevity and (two-thirdsweight) and the combinedprimary, secondary, and educationfared well in the communistsystems. And while its tertiary enrolment ratios (one-third weight); and standard of "peoplelacked social and politicalfreedom," they also "enjoyed living, measuredby real GDP per head (in dollars,on purchas- full employmentand an extensivesystem of socialprotection." ing power parity). The UNDP predicts"The worsening life expectancyfor the early The table on the next page ranks the countries in transitionac- 1990sand the deterioratingquality of education in many FSU cordingto their HDI, as calculatedin the Human Development countries could cause further decline in their human develop- Report 1998, released by the UNDP.Slovenia took the high- ment indexes, and could affect the potential for economic est marks, followed by the Czech Republic, Slovakia, Poland, growth." As indicatedin Human DevelopmentReport 1998, and Hungary.Russia ranks 71st in the survey. Five countries the picture is more complex: out of 27 transition countries, 12 closing the ranks of transition economies are Moldova, did worse than in 1994, but 15 did better.

* TRANSITION,August 1999 ( 1999 The World Bank/The William Davidson Institute percent (such as Armenia), and most not been paid for many months-as in halfthe GDP in 1997,while in Hungarythey having more than 10 percent of their la- Belarus, the Kyrgyz Republic, Russia, were about30 percentof the total national bor force officially out of paid work. and Ukraine. income.A high proportionof the economi- Added to the openly unemployedare the cally activepopulation is thus not covered millions of discouraged workers in the With the increase in unemploymentand by entitlement to insurance-basedsocial region who have dropped out of the la- underemployment,informal economic ac- protection and is being subjected to in- bor force and the millions of others who tivities-including the blackmarket or other secure working conditions with low pay are classified as on "administrative illegal activities- haveexpanded. In Rus- and negligible or nonexistent benefits. leave" or who continue to work but have sia informal activitiesaccounted for about This has become an important problem

Ranking of transition countries according to their Human Development Index Combined first-,second- Human RealGDP andthird- developmentper caDita Life Adult levelgross index (PPP$J expectancyliteracy enrollment RealGDP Life (HDIJ rank at birth rate ratio percapita expectancyEducation GDP value minus (years) (%l) (%/.) (PPP$) index indexindex index HDIrank # HDIRank 1994 1997 1997 1997 1997 1997 1997 1997 1997 1994 1997 1994 1 Canada 79 99 99 22480 0.9 0.99 0.9 0.932 12 2 Norway 78.1 99 95 24450 0.89 0.98 0.92 0.927 5 3 UnitedStates 76.7 99 94 29010 0.86 0.97 0.95 0.927 0 33 Slovenia 35 74.4 99 76 11800 0.82 0.91 0.8 0.845 0.886 5 3 36 CzechR. -39 73.9 99 74 10510 0.81 0.91 0.78 0.833-0.882 3 3 42 Slovakia -42 73 99 75 7910 0.8 0.91 0.73 0.813 0.873 9 12 44 Poland -58 72.5 99 77 6520 0.79 0.92 0.7 0.802-0.834 18 14 47 Hungary -48 70.9 99 74 7200 0.76 0.91 0.71 0.795-0.857 8 6 54 Estonia -71 68.7 99 81 5240 0.73 0.93 0.66 0.773-0.776 15 -8 55 Croatia -77 72.6 97.7 67 4895 0.79 0.88 0.65 0.773 -0.76 18 -10 58 Cuba n.a. 75.7 95.9 72 3100 0.84 0.88 0.57 0.765 47 60 Belarus -62 68 99 80 4850 0.72 0.93 0.65 0.763 -0.806 15 -13 62 Lithuania -76 69.9 99 75 4220 0.75 0.91 0.62 0.761-0.762 22 -8 63 Bulgaria -69 71.1 98.2 70 4010 0.77 0.89 0.62 0.758 -0.78 23 -9 68 Ronmania -79 69.9 97.8 68 4310 0.75 0.88 0.63 0.752-0.748 13 -3 71 RussianFed. -67 66.6 99 77 4370 0.69 0.92 0.63 0.747 -0.792 8 -7 73 Macedonia,TFYR -80 73 94 70 3210 0.8 0.86 0.58 0.746 -0.748 28 -5 74 Latvia -92 68.4 99 71 3940 0.72 0.9 0.61 0.744 -0.711 15 -6 76 Kazakhstan -93 67.6 99 76 3560 0.71 0.91 0.9 0.74 0.709 15 -6 85 Georgia -105 72.7 99 71 1960 0.8 0.9 0.5 0.729 0.637 37 -31 87 Arn-rnia -103 70.5 98.8 72 2360 0.76 0.9 0.53 0.728 -0.651 26 -24 91 Ukraine -95 68.8 99 77 2190 0.73 0.92 0.52 0.721 -0.689 27 -14 92 Uzbekistan -100 67.5 99 76 2529 0.71 0.91 0.54 0.72 -0.662 19 -14 96 Turkrrenistan -85 65.4 98 90 2109 0.67 0.95 0.51 0.712 0.723 24 -12 97 Kyrgyzstan -107 67.6 97 69 2250 0.71 0.88 0.52 0.702 -0.631 19 -18 98 China -108 69.8 82.9 69 3130 0.75 0.78 0.57 0.701 -0.626 6 -3 100Albania -102 72.8 85 68 2120 0.8 0.79 0.51 0.699-0.655 19 -4 103Azerbaijan -106 69.9 96.3 71 1550 0.75 0.88 0.46 0.695-0.636 34 -25 104 Moldova -110 67.5 98.3 70 1500 0.71 0.89 0.45 0.683-0.612 35 -28 108Tajikistan -115 67.2 98.9 69 1126 0.7 0.89 0.4 0.665 0.58 46 -35 110Vietnam -121 67.4 91.9 62 1630 0.71 0.82 0.47 0.664 -0.557 23 -26 119 Mongolia n.a. 65.8 84 55 1310 0.68 0.74 0.43 0.618 26 140Lao People's Dem. R. n.a. 53.2 58.6 55 1300 0.47 0.57 0.43 0.491 6 EasternEurope and the CIS 68.6 98.7 76 4243 0.73 0.91 0.63 0.754 Industralizedcountries 77.7 98.7 92 23741 0.88 0.96 0.91 0.919 World 66.7 78 63 6332 0.69 0.73 0.69 0.706 Source: UNDP Report 1998.

(C 1999 The AVorldBank/The WilliamDavidson Institute TRANSITION,August 1999 X for a growingnumber of women, who have beenpushed out of the formal labor sector. ys How Can New DevelopmentStrate- in Transition Economies gies and Policies Help? by Misha Belkindas, Mustafa Dinc, and Olga Ivanova

Becauseof the protractedand complexna- ince the countries of Central and informaleconomy-already welldeveloped ture of transition,the responsibilitiesof the Eastern Europe and the former in the pre-reformperiod-expanded. Infor- stateshould increase ratherthan decrease. Soviet Unionbegan the transition mal activities were not measured by sta- The state should be active and intervene in Thersticalateassho e macketvn inervencannt to market-basedeconomies, their statis- tistical reporting and the macro criticaluareaswherfiien mllocarkt ofo rcesc tical systems have struggledto operate in aggregateswere not properlyadjusted to ensure an efficientallocation of resources the new environment.The qualityof socio- capturethem. portuwhtiereaccs torbasliod assneqitsanoP economic indicatorshas deterioratedsig- * Adjustingto internationalstatistical stan- portunities for livelihood is inequitable nificantlyoverthis time, due primarilytothe dards-notably, switchingfrom the Mate- Market forcesalon canneverbereliedon following reasons: rial Product System to the UN System of to create a fair or equitablesociety. * With loosenedcontrols, enterprises have NationalAccounts-was delayed. been less inclined to provide complete The key to economicrecovers is to stimu- data to statisticalauthorities. In pursuitof In 1998 the TechnicalAssistance in Sta- latehigher levelsof investmentincluding tax evasion,there are strong incentivesfor tistics team of the World Bank Develop- investmentin humancapabilities. Revitaliz- underreporting. ment Economics Data Group conducted ing economicgrowth should be a priority . Many newly established private enter- a survey to assessthe quality of statistics Tidoverxadnotimply,ofever, s socialwssel prises, especially if family-owned, have in a number of transition countries. The This does not imply,however, that essential escaped the statistical network because findingssuggest that in manycountries the expedi es hu an elopme shoud business registers are both incomplete basicdata are well belowsatisfactory level be postponed.Such expenditures are a and outdated. (assumedto be equalto 3; see figure),with stimulusetodgrowthdesnafand the trajection. 0 With the loosening speed,and destination of the transition. of state control the a strong correlation between average data Data Quality in TransitionCountries Shiftingfrom universal coverage of ben- (The higher the per capita GNPthe better the data quality.) efits and servicesto selectivityand tar- -______geting based on means testing has created substantial problems. Such schemes rarely are effective in reaching the intended beneficiariesand invariably involve high administrative costs. In ad- dition, governments have been wrongly 3.5 ' ft6d advised to privatize many of their social Ba Skorgu.4 services and social protection programs. 3 R, LSPp.& k Cech p4 The state must intervene because the substantial positive externalities from M 2.5 suchexpenditures, or additional benefits, are enjoyed bysocietyasawhole. 2.0 T hIdT*j:ita e

Based on Transition 1999-Human *s Development Report for Central and 1.0 Eastern Europe and the CIS, a United Nations publication. Website: http:// www.un.org/publications. Email: publica [email protected]. Furtherinformation: UNDP 0.0 Publications, New York, Ms. Kowkab 0.0 500 ics 2000 3COO 4000 ono0

Simaan, tel. 212-906-6734. Source:compiled by authors. NPPerapitk

* TRANSITION, Alugust 1999 (D 1999 The World Bank/The William Davidson Institute World Bank Loan Strengthens Russia's Statistical System

A $30million World Bank loan to Russiasupporting the "Devel- ofthe statistics. Further, certain economic activities carried out opmentof the StateStatistical System" project was approved in by those in the shadoweconomy either are not capturedor May 1999and covers all aspectsof the statisticalsystem. The coveredpartially by officialstatistical reports. This places ad- Russiangovernment will contribute an additional $8.55 million to ditionalchallenges on statisticians to makeadjustments to pri- theproject. Goskomstat, the state statistical office, together with maryinformation. The World Bank-supported project will help other data collectingagencies, faced manychallenges that to restructurethe statistical system and strengthen the data col- emergedwith the systemic changes in theRussian Federation. In lectionagencies. It will introduceup-to-date information tech- macroeconomicstatistics, the Goskomstat started to shiftto new nologybased on modern equipment and software to the system. macroeconomicindicators in compliancewith the 1993 System of NationalAccounts (SNA), and began collecting and dissemi- Goskomstatwill implementthe mainpart of the projectat the natingdata on prices.It introducedthe Consumer Price Index federaland regional levels. Several subprojects will be imple- (CPI)and other price indexes as well as newindicators reflecting mentedin otheragencies-for example,the Ministriesof Fi- thesocial development. These efforts, helped by internationalor- nance and Economy,the StateCustoms Committee, and ganizationsand bilateral donors, have led to substantial improve- severalregional administrations. Consultation, collaboration, mentsin macroeconomicand social statistics in Russia. informationsharing, and supportamong stakeholders (the World Bank,Goskomstat, other data producinggovernment Despitethese achievements,further efforts are neededto agencies,and data users) are consideredto be keyfactors for achievetimeliness, quality, relevance, and comprehensiveness success. qualityand per capita dollar GDP in these the contentof the forms-along with the alsoprovide a benchmarkfor thedesign countries. number of respondents-defines the and conductof modernsample surveys "width"and the "depth"of the raw data basedon probabilitysampling methods. Thestatistical systems for collecting,pro- madeavailable for furtherprocessing. Samplesurveys, while technically more cessing,and disseminatinginformation demandingin designand conduct,are have to be restructuredto meetthe de- Thenumberofrespondentsdependsontheless expensiveand can producemore mandsfor dependabledata-from the surveytechnique. Statistical data collection timelystatistics than censuses. government,to underpinits policydeci- canbe conducted either on a full-coverage sions; from the businesscommunity, to basis(census) or a part-coveragebasis (a DataProcessing. Still highlydecentral- makeproper investment decisions; and samplesurvey). izedin mosttransition countries, data pro- fromthe general public, to satisfytheir re- cessing in the form of data capture, quirementsfor informationabout firms. Thefull-coverage census-a predominant editing,and tabulation is donein localof- Andthis restructuring must be undertaken methodunder central planning-does not fices.Thus primary data never get to the withscarce resources and without disrup- workin a marketeconomy because it im- centralheadquarters; only summaryin- tions. While the major requirementsto posesan impossibleworkload on statisti- formationis passedupwards. This decen- streamlinestatistical systems in the tran- caloffices due to the explosivegrowth in tralized system was designedto help sitioneconomies are clear,it is alsoclear the numberof entitiesto be surveyed. administerthe commandeconomy and thatthe process will take time. trackfulfillment of the plan. Its legacy is still Fora samplesurvey to berepresentative, alive:statistical data processing is carried Collecting,Processing, and thosedeveloping the survey need to know out on microcomputers,using individual DisseminatingData thetotal numberof enterprisesand their softwareprograms. Thus central statisti- relevantfeatures. As the privatesector cal offices are unableto use the more DataCollection. In the transitionecono- grows and enterprise activity extends handyandefficientstandarddataprocess- mies most statisticalobservations are overregions and diversifies in nature,the ing and data analyzingpackages avail- basedon questionnairesfilled out by re- reliabilityof statisticalregisters becomes able. spondentsand returned to regionalstatis- increasinglyimportant. Comprehensive tical offices.The amountof information and regularlyrecurring censuses of ma- The dataprocessing system needs to be reportedvaries and may includefrom 10 jor economicareas are still neededto changed.Data processing is moreeffective to 100indicators. Because respondents providedetailed statistics at the national, if donecentrally-allowing for economies of includeboth enterprises and authorities, regional,and local levels. These censuses scalein personneland equipment. Sophis-

© 1999 The World BanklThe William Davidson Institute TRANSITION,August 1999 U ticated data capture-high speed keying, * Conducting a broad-based review of World Bank'ssupport takes severalforms, coding,scanning, and electroniccollection what kinds of statistics are economically depending on the scale and scope of the techniques-machine editing and imputa- justified at the state, regional,and district project. It can come in the form of a grant, tion, complextabulation, data storage,and levels; decidinghow frequently these are part of a larger World Bank loan, a sepa- backup are also easier to handle from a neededand what accuracycriteria should rate loan, or a partnership arrangement singlelocation. Centralized processing im- be applied to key statistics; and working cofinancedwith bilateraldonors and other provesuniformity and accessto data, but it out a timetableto apply internationallyac- internationalagencies. requiresstatisticianswith bettertraining and cepted, standard practices. morepowerful computers. * Establishinga solid statisticalinfrastruc- Governmentsin transitioncountries should ture and well-designed legal framework workoutdetailedplansandcostestimates Data Dissemination. Statistical offices that includesbusiness and householdreg- for developing their statistical systems. and other governmentagencies in transi- isters,questionnaires, censuses, and sur- These plans wouldenable them to assess tion economies have just started to pro- vey procedures. their financial needs, decide whether to vide data to users in electronic formats. 0 Reorganizingandmodemizingthedesign,applyforaWorld Bankloan, and allowpos- Most of these products are simply elec- strategy,and implementationof the datadis- sibledonors to coordinatesupport. To ac- tronic versions of printed reports. Elec- seminationsystem, thus improving economic complishthis more effectively and efficiently, tronic products should contain more managementand decisionmakingin the Development Economics-the research detailedinformation than printed products, governmentas well as in the privatesector. arm of the World Bank headed by Vice given the lower cost of providing data in 0 Creating standardized electronic data President and Chief Economist Joseph suchelectronic formats as CD-ROM.Even sharing facilities, with user-friendly soft- Stiglitz-has recentlyestablished a special entire data sets can be provided to users, ware, supportedby effectivecommunica- trust fundthat will extendthe abilityof tran- allowing them to aggregate the data ac- tions, to serve government users in a sition economies to get technical assis- cording to their needs. timelymanner. tanceand financing for developmentof their statisticalsystems. The lnternetisrapidlybecomingtheworld- How to Find Funds? wide medium for informationdissemina- Misha Belkindas is Team Leader, tion. Statistical offices should use the In many transitioncountries, restructuring Mustafa Dinc, Consultant, and Olga Internet to deliver productsto users. But the statisticalsystem requiressubstantial Ivanovais, Economist at the TAS team this assumesthe availabilityof the neces- resources-technical and financial. The at DECDG, the World Bank. sary electronichardware. The Internet of- fers new possibilitiesto central statistical Parental Advice offices to recoversome of the costsof their 6> \______operations.They can make availablecer- tain statisticalinformation on a subscrip- tion or fee basis. Governmentagencies, 1 l \ 1 however,should have access to all thisin- formationfree of charge.

Checklist of Unfinished Business

Transitioneconomies have made consider- able improvementsin their statisticalsys- tems,but there remains much to accomplish: * Designingand conductingsample sur- veys that meet internationalstandards, graduallyreplacing regular economic and businesscensuses with sample surveys, t( using an optimum mix of censuses and sample surveys for economic and busi- "I can make you member of a board of directors, but you have to finish ness statistics, and providing the neces- elementaryschool on your own." sary trainingfor staff. From the Hungarianmagazine H6cipo

T RANSITION, August 1999 ( 1999 The WVorldBank/The William Davidson Institute THE WILLIAM DAVIDSON INSTITUTE AT THE UNIVERSITY OF MICHIGAN BUSINESS SCHOOL

Why Do Finns Hide? Bribes and Unofficial Activity after Conununism by Simon Johnson, Daniel Kaufmann, John McMillan, and Christopher Woodruff

A substantialamount of output in many view the remedyto unofficialactivity is land,Romania, and Slovakia on the other. developingand post-communisttransi- better policingand enforcementof the Byallmeasures the countries of theformer tion economiesgoes unreported.This criminalcode. SovietUnion are more hostiletoward busi- "unofficialeconomy"-made up of under- 0 The unofficialeconomy may result from nessthan the East European countries. A groundand often illegal activities-im- theinadequacy of the institutional environ- striking90 percentof Russianand Ukrai- pedesthe country's economic growth in a ment.If it is hardto enforcecontracts be- nian managerssay it is normalfor bribes numberof ways.First, firms operating un- causethe courts do notwork, a firmgains to be paidto governmentofficials. Around dergroundin this shadow economy cannot littlefrom registeringits business.In this 90percent of the managersalso said that make use of market-supportinginstitu- viewthe state needs to investin a commer- firmsin theirindustry pay for "protection" tions-such asthe courts-and so mayin- cialcourt system to deterunofficial activity. of theiractivities. The firms suffer extortion vesttoo little.Second, doing business in not onlyfrom bureaucratsbut alsofrom secretgenerates distortions because of the Mostof theempirical research on the un- criminalgangs. effortneeded to hideactivities and avoid officialeconomy uses macro data, such detectionand punishment. Resourcesthat astheamountofcashin circulationorelec- Corruptionis less pervasive,though not arehidden may not find their highest-value tricityconsumption. These estimates con- uncommon,in EasternEurope. In the Slo- uses.Third, underreporting costs the gov- sistentlyshow that countries with inefficient vakRepublic 40 percent of managerssay ernmenttax revenuethat mightbe putto regulatoryenvironments and widespread bribesare paid,and in Polandand Roma- worthwhileuse. corruptionhave an unofficialeconomy niathat number is 20percent. The mafia is leadingmore than in excessof 40 percent lessof aproblem in Eastern Europe as well. SomeReasons for Hiding of theofficial GNP. Only 15 percentof Slovakianmanagers, andstill fewerPolish (8 percent)and Ro- Whatcauses firms to operatein theseun- DoesExperience Match Theory? manian(1 percent)managers, said protec- officialeconomies? Economic literature tion paymentsare normallymade. The offersfour explanations, each with distinct Post-communistcountries offer an oppor- firms'tax payments are lower in these three policyimplications: tunityto examinethe determinantsof un- countriesthan in Russiaand Ukraine. One * Entrepreneursmay go underground official activity because, startingfrom costto a firmoperating outside the formal whenstatutory tax rates are highand other similar levelsof unofficialactivity, their economymight be less reliance on the pro- officialregulations are onerous.Cutting regulatoryenvironments have diverged. tectionof the courts, making it hardto main- taxesand red tapeare, accordingto this Recentstudies estimate that in 1995the taincontracts with its trading partners. When view,the mainways to keep firmsin the unofficialeconomy in Polandwas less than askedwhether they could use courts to en- officialeconomy. 15 percent of GDP but in Russia and forcecontracts with tradingpartners, just * The predatorybehavior of government Ukraineit wasaround 50 percent. overa halfin Russiaand Ukraine said they officials-who seek bribesfrom anyone could,whereas two-thirds or morein Po- with officiallyregistered economic activ- So why do firms hide? Usingfirm-level land,Romania, and the SlovakRepublic ity-will drivesome businesses into unof- datafrom a surveyof similar private manu- saidthey could. ficial activities.In this view eliminating facturingfirms in Poland,Romania, Rus- bureaucraticcorruption will preventsome sia,the Slovak Republic, and Ukraine,we All the firmsin our surveyare registered of theflight into the shadow economy. tried to find the reasons.The data show and operatein the formaleconomy, but * Firmsmight hide some of their output to thatthe five countries fall into two groups: manyof themhide at leastsome output. escapeextortion by criminal gangs. In this Russiaand Ukraine on the one hand, Po- Underreported sales are highest in

(C 1999 The World Bank/The William Davidson InStitUte TRANSITION,August 1999 d Ukraine (averaging 41 percent of total Wefind onlyweakevidencethattheabil- Thereisasignificantassociation between sales)and Russia(29 percent),and much ity of the legal systemto enforcecontracts corruption-in the form of bribes paid to lower in Poland, Romania,andtheSlovak affects entrepreneurs' decisions on government officials-and the hiding of Republic(between 5 and 7 percent).Man- whether to hide their activities.Ability to output. This is far worse in Russia and agers in Russia and Ukraine, then, face access bank loans and to involveoutside Ukrainethan in EasternEurope. But even worse bureaucraticcorruption, more mafia owners also do not appear to be signifi- within Eastern Europe, firms that say bu- extortion, higher taxes, and a less effec- cant issues.This is probablybecause the reaucrats are corrupt are more likely to tive court system.They also hide more of firms in our samplemaintain at leastsome hide their activities. However,we cannot their output. Comparing averagesacross officialactivity and have accessto govern- distinguish whether firms hide more to the countries, therefore, gives support to ment provided publicservices. avoid corruptionorwhether firmsthat hide all four explanationsfor hiding. more have to make illegal payments.We We findno evidencethat payments to private leave this for further research. Firm-level data from Poland, Romania, criminalgroups affect the decisionto hide and the Slovak Republic find no signifi- activities.This may bebecause we surveyed This article is based on a paper by Simon cant association between tax rates and manufacturingfirmsthatarerelativelyimmuneJohnson, The Sloan School, MIT and the extent of unofficial activity in those from mafia-runprotection rackets. Mostlikely, WDl ResearchFellow, Daniel(Kaufmann, countries. If there is a tax rate effect, it however,it indicatesthat organizedcrime is WorldBank, John McMillan,Stanford and probably lies more with the way the tax not as largea problemin EasternEurope as WDI Research Fellow and Christopher system is operated. it is in Russiaand Ukraine. Woodruff, UCSD.

Foreign Investment and Emerging Markets: Highlights of a Conference Organized by the William Davidson Institute by Bernard Yeung

n June 18-19, 1999, 25 distin- searchers, managers, and public policy to weaknessesin data and measurement. guishedexperts on FDIattended decisionmakers. FDIdata are not very reliable.Also, FDI is a conference in Ann Arbor, not merely bricks and mortars, it includes Michigan, on the impact of FDI on Richard Caves of Harvard University set the extent to which the investing firm in- emerging markets. Following introduc- upthe conference'stheme in his introduc- volves itselfin the localeconomy. To mea- tory comments, the five sessions fo- tory presentation. He surveyed crucial sure FDI properly,one hasto master how cussed on capital markets, labor findings on the spillover effect of FDI, ar- it manifests itself in terms of "ownership, markets, institutional and economic guing that the capability to develop com- control, and contributionto capital forma- performance, social transformation, plex business organizations might be tion." Measurementis further complicated and public policies. importantfor economicdevelopment and by the factthat the influenceof FDI on eco- for the interactionbetween FDIand indig- nomic growth is both multifaceted and The sessions were linked by the theme enous firms. Spillovers thus depend on highlyvariable. that the institutional environment mat- exactly what constrains the indigenous ters-where the institutionalenvironment developmentof complexenterprises. He Capital Markets is defined to include the level of entrepre- proposed four constraints: the local neurial and monitoring capability and the environment's traditional forms of inter- Randall Morckof the Universityof Alberta legal and sociological structure. The im- personal relationshipsand its shortage of presenteda summaryof his workwith vari- pact of foreign entry on emerging econo- skills, knowledge, and managerial capa- ous coauthors including Bernard Yeung, mies depends on the initial institutional bilities. Universityof Michiganand DavidsonInsti- environment and how it evolves. In turn, tute, David Stangeland, University of foreign entrychanges the institutionalen- FollowingRichard Caves, Monty Graham Manitoba,Wayne Yu, Queen's University, vironment, as does the behavior of the of the Instituteof InternationalEconomics Ontario and Artyom Durnev,University of indigenous firms. Understanding these notedthat most of the recentempirical lit- Michigan. He presented evidence that relationshipsand their underlyingdynam- eratureon FDI and economicgrowth fails economicgrowth is slower in countries in ics will lead to fundamentalinsights for re- to reveal a robust relationship,partly due which the controlof wealth is concentrated

E TRANSITION, August 1999 C 1999 The World Bank/The William Davidson Institute in a few hands.Many emerging economies many Eastern Europeaneconomies, de- Social Transformation havesuch "controlling hands"-entrenched spitetheir high levelsof humancapital. His managerswho often do not have a signifi- statistics suggested that the explanation SrilataZaheer of the Universityof Minne- cant shareof ownership.To preservetheir is that theseeconomies lack infrastructure sota drew the audience'sattention to how status, these managers discourage the and entrepreneurialcapabilities and that interactionswith foreign business led to developmentof a healthy capital market, they carry a high politicalrisk. social changes. Interactionswith foreign resist reforms and liberalization,and typi- businessinclude direct investment, licens- cally do not introduce innovationsin their The work byAnn Barteland Ann Harrison ing, joint ventures, and more. Social own firms. Morckshowed some evidence of the Columbia Business School further change as a result of these interactions that firmswith thesecontrolling hands have developed the conference's emerging was felt in labor rights and environmental access to less expensivecapital but also theme. The authors disentangled the standards,just to namea few. Public dis- have subpar performance. Moreover, sourcesof publicsector inefficiencyusing cussions in developed economies often economieswhere controlof wealth is con- 1981-95 panel data on manufacturing tend to be ethnocentric,condescending, centratedtend to be less open and spend firms in Indonesia,focusing on protection and dominatedby specialinterest groups, less on innovation. from competitionand accessto soft loans. many with hidden self-interests.Special Accordingto their results,the existingcon- interestgroups oftenuse multinationals as After controllingfor openness,regulations, trolling hands of corporateassets clearly a means for pushingtheir social agenda and spending on innovation, economic are not running their firms competitively on poorer economies.Most often lacking growthremains negatively associated with and yet try to preserve the status quo.As in the discussionsis an understandingthat concentrationin the controlof wealth. Morck's a consequence,the local economy does people in the poorer economies are ca- resultssuggest that concentrationin asset not readily developindigenous agile firms pable of making consciousand voluntary control negatively affects the rest of an that can benefitfrom interactionwith for- choices on their own, though in some economy.He furthershowed evidence that eign business. casesthey may not be very well informed. foreignentrants tend to breakup the strangle- Zaheer pointed out that althoughsystem- hold of controllinghands by reducingtheir Institutional and Economic atic researchhas begunto appear,the lit- controlof corporateassets. Performance erature in this area is still thin.

Simeon Djankov of the World Bank and Bruce Kogutof the Universityof Pennsyl- Public Policy Caroline Freund of the Federal Reserve vania and Andy Spicer of the University Boardfollowedwithadiscussiononforeign of California-Riverside focused on the Marina Whitman of the University of acquisitionactivities in Korea.Theyshowed importance of institutions. They showed Michigan Business School discussed that foreign acquisitiontargets are more that in the absence of an institutional the change in U.S. policy discussions re- likelyto be affiliatedwith businessgroups. mechanismof state regulation and trust, garding FDI. In the past, FDI was seen privatizationpolicies in the Czech Repub- as a vehicle for the economic develop- Labor Markets lic and Russiaare not successful.Indeed, ment of poor nations and as a partial without strong institutions markets be- substitute for foreign aid. Also, a clear JuanAlcacer of the Universityof Michigan come arenas for political contests and positive relationship was thought to ex- presented evidence that FDI is attracted economic manipulation. ist between economic development and not only by low wages but alsoby inexpen- political stability-pointing the way to- sive humancapital. In order to attract FDI, Tarun Khanna of the Harvard Business ward democracy. In the 1990s the focus a country needs to attain a minimumlevel School presented his work with Krishna shifted to economics. Policy discussions of human capital development and then Palepu, also of HarvardBusiness School. now focus on the relationship between offer that capital at a competitive wage. UsingChilean data they demonstratedthat FDI and employment, wages, income Cross-countrydata fit betterwith his model firms enjoyednet benefitfrom their affilia- distribution, trade and payments bal- than argumentsfocusingon wages.Implicit tion with Chilean business groups in the ances, home capital investment, and in this argument is that in order to attract 1988-96 period if group diversification spending on innovations. FDI, an emerging economy's workforce exceededa thresholdlevel. Theyalsofound needsto attaina fair level of "businessso- evidenceof nondiversification-relatedgroup More recently new and important issues phistication,"a point that echoes Richard benefits. Their results suggest that firm- have been added to the discussion: Do Caves'opening presentation. Alcacer then groupsmay be usefulsubstitutes for poor multinationalslead to "racing for the bot- raisedthe issuethat there was little FDI in marketinstitutions. tom" as regards environmentalrights and

C) 1999 The World Bank/The William Davidson Institute TRANSITION,August 1999 F labor rights? Do domestic policies like David Li, of the Universityof Scienceand local autonomy within many developing export controls(for security reasons) and Technology,Hong Kong,and the Davidson nations, leadingto politicalinstability and does the Foreign Corrupt Practices Act Institute,described the peculiarpattern of whether there is too much globalization. affect a multinational'sability to compete FDIin China,most of whichhas taken place Thefear iswhether too much globalization globally? Finally, Whitman drew the intheformofjointventuresbetweenforeign leads to economic instability. Additional audience'sattention to a question Danny entrantsand indigenousfirms since 1992. concernsabout globalization include urban Rodrickfirst raised:has globalizationgone A largemajority of the investmentwas round populationgrowth, environmentalissues, too far? In a numberof industrializedcoun- trip in nature; in other words, indigenous and the needed improvement in banking tries there is tension betweenthe greater firms investedin Hong Kong and then re- and other capital markets. economic uncertainty and the perceived investedin Chinaasforeign investment. He need for social insurance created by in- arguedthat localgovernments, competing Don Lessard of MIT concluded the con- creased openness. Tension also stems forforeigninvestment, created intemal taxes ference by pointing out that we need to from the growing limitationson the ability and regulationsthat favoredFDI. As a con- knowmore aboutinstitutional environment to tax mobile factors of production-par- sequence,a localenterprise forming a joint and how it affects a country's economic ticularly capital. venturewith a foreignenterprise could use interactionwith other economies. the jointventure to competemore success- Jan Svejnar,Executive Director of the Wil- fully with otherlocal firms. BernardYeung isArea Directorfor Foreign liam DavidsonInstitute, described the un- DirectInvestment at the WilliamDavidson even distribution of FDI in Eastern Simon Evenett of the World Bank high- Institute and Professor of International European countries. All these countries lighted the concerns of the supranational Businessand BusinessEconomics at the have gotten over an initial fear of being organizations-the growing pressuresfor University of Michigan Business School. taken over by foreigners,and the race has begunfor FDI. Theattempt to have a level Recent working papers of the William Davidson Institute: playing field has been replaced by an at- http://Iib.bus.umich.edu tempt to maximize FDI flows. Guariglia,Alessandra,and Byung-Yeon neurial Attitudes in Poland. WP 237, Kim. Unemployment Risk, Precau- March 1997. FDI Motivations tionary Savings,and Moonlightingin Russia.WP 232, June 1999. Jackson,John, Jacek Klich, and Krystyna Linda Lim, of the University of Michigan Poznanska. Firm Creation and Eco- Business School, pointed out that Asian Mitchell, Janet. Theories of Soft Bud- nomicTransitions. WP 238, July 1998. economieswere more receptive to FDI. get Constraints and the Analysis of Cases in point would be Singapore and BankingCrises. WP 233, March 1999. Jackson,John, Jacek Klich, and Krystyna Malaysia,which haveby farthe highestper capita, or per dollar of GDP, FDI in the Bonin,John. BankingReform in China: Poznanska Democrac Institutions world. She offered several important ex- Gradually Strengthening Pillar or and Economic Reform: the Polish planations.The first is the geographyand Fragile Reed?WP 234, June 1999. Case. WP 240, April 1998. pro-trade history of these countries. The Lizal, Lubomir. Does a Soft Macroeco- Carare,Octavian, Constantijn Claessens, second is that these countrieshave diver- nomic EnvironmentInduce Restruc- and EnricoC. Perotti.Can Governments sified local cultures that are receptive to turing on the Microeconomic Level Maintain Hard Budget Constraints? the economic participation of foreigners. during the Transition Period? Evi- Bank Lendingand FinancialIsolation Finally,foreign entrants are competingwith dence from Investment Behavior of in Romania.WP 241, January 1999. local capitalists who are mostly a very CzechEnterprises. WP235, June 1999. small and politicallyvulnerable ethnic mi- Perotti, Enrico, and Stanislav Gelfer. nority.These countries usefamiliar public Bratkowski, Andrzej, Irena Grosfeld Investment Financing in Russian policies like tax holidays to attract FDI. and Jacek Rostowski. Investmenti Financi nguinRus.ian Oftenattachedtotheseattractionsarepre- and Finance in De Novo Private Financial-Industrial Groups WP designatedregional location and require- Firms: Empirical Results from the 242, October 1998. dentsignatedargona, locaiong trandfeqre- Czech Republic, Hungary, and Po- mentsin localcontent, technologytransfer, land. WP 236, April 1999. Perott, Enrico, and Pieter van Oijen. and employment.Many of these countries Privatization,Political Risk, and Stock are opponentsof the WTOpolicy intended Jackson, John, and Aleksander S. Market Development in Emerging to removesome of these practices. Marcinkowski. Analysis of Entrepre- Economies.WP 243, March 1999.

* TPANSITION,August 1999 (C 1999 The World Bank/TheWilliam Davidson Institute How Will We Know Transition is Over? by Annette N. Brown Thisintroductory chapter of theauthor's study "When Is TransitionOver?" brings together the thoughtsof leadingscholars on the processof transition,with a focuson theinstitutional, economic, and political standards that indicate the end of thetransition period.

Thecountries that are changingfrom com- she also assessedthe outcomesusing AndersAslund focused on one issue: rent- munistto post-communistsocieties are the HumanDevelopment Index, which so seeking.Aslund drew a clearline between undergoinga processthat hasbeen and far shows improvementsin only a few rent-seeking(which he defines as theex- continuesto be difficult,tumultuous, and countries.Lavigne listed several barriers tractionof monetary benefits from the gov- oftenpainful for their citizens. In a few short to achievingstandard market economies ernment)and inflation and between inflation years,people in thesecountries have lived andthen discussed more specifically the andGDP performance. He then identified throughmore social, political, and eco- obstaclesthat the candidatecountries thevarious types of rent-seekingand iden- nomicchange than those in moredevel- face in achieving EU membership.In tifiedwho has benefited the most from each. oped, Westerneconomies will see in a termsof barriers,she again stressed the Inexplaining why rent-seeking was so much lifetime.Both for thoseliving through this problemof attitudesand emphasizedthe morea problemin theformer Soviet Union processandforthosewhostudyandana-need to build strongcivil societies.For than in East-CentralEurope, Aslund ex- lyzeit, there is a recurringquestion: When EUmembership, the obstacles arise from ploredthe political-philosophical legacies is thistransition over? poorly defined membershipconditions of the communistsystem, including the thatare in somecases stricterthan those strength of the old communist elite Duringthe 1997/98academic year, six for currentmembers. (nomenklatura);the weaknessesof the distinguishedeconomics scholars-Marie post-communiststate, democracy, and civil Lavigne,Alan Gelb, Anders Aslund, Nicho- Alan Gelbstarted by elaboratinga point society;the quality and independence ofthe lasLardy, Jan Svejnar, and Janos Kornai- thatgeneral economic analysis often for- media;and the people's understanding of visitedWestern Michigan University and getsor ignores,but is broughtto thefore- andattitudes toward the market. Economic offeredtheir answers to this question.Their front by transition: "Like automobiles, legaciesalso influence rent-seeking, such answersare in someways very different marketeconomies come in manydifferent as kleptocracy,perverse relative prices, and in othersvery similar,but always in- models."To be successful,Gelb argued, deepfinancial crises, and natural resource terestingand insightful. In this introduction, reformpolicies need to be broad-based endowments.Aslund then argued that rent- I will presentthe speakers, their lectures, (becausethey are highlyinterdependent) seekinghas beensignificantly reduced in andtheir answers. and sustained(because the cumulative mostof the countriesof theformer Soviet exposureto reformsis more important Unionand emphasized that privatization The Speakers thanthe immediatereaction in determin- servedto diminishrather than to increase ing outcomes).Different forces drive re- rent-seeking. MarieLavigne began her lectureby out- forms,which naturally lead to differences lining the manylegacies of communism in the pace and phasingin of change NicholasLardy's lecture was distinctin andexplaining how they negatively affect acrosscountries. There are alsomany, if that it focusedon onecountry-China- thetransition process. She argued that one nottoo many,explanations for transition thathas followed the very different reform significantlegacyiswhatshecalls,credit-outcomes. Gelb asked the question, path of gradualism. Lardy compared ing Janos Kornai, "paternalism."This "Couldan alternative policy have worked China'sreforms, starting in the 1970s,to legacymeans that changesin basicatti- in Centraland EasternEurope and the thoseof EasternEurope and the former tudesare neededbefore people behave formerSoviet Union?" In his conclusion, he SovietUnion and arguedthat in spiteof as propereconomic "agents." She then raisedan evenmore important question: China'ssuperior economic performance, describedthe basicelements of the tran- "Whatkinds of economiesand societies its reformsare unsustainable.Three is- sitionpackage, discussed generally how willthe transition countries turn out to be?" suesraise particularconcern: enterprise theseelements have been implemented, Heidentified, in particular,the increasingly performanceand debt, nonperforming andcompared the outcomes. In short, she unequaldistribution of propertyand in- bankloans, and declining tax revenues.In foundthat in the transitioncountries lib- comeas a majorchallenge for thefuture. the secondpart of his lecture,Lardy ex- eralizationhas beenfast (in mostcases), aminedthe necessaryreform of China's stabilization fragile, and structural trans- Where Gelb offered explanationsfor the bankingsector in more detail. It would be formationslow. Unlike the otherauthors, differencesin outcomesamong countries, extremelydifficult for Chinato defaulton

© 1999 The WorldBank/The William Davidson Institute TRA\SMO\- August 1999 * household liabilities, as Russia did, be- the ethical principlesunderlying his analy- is important to consider because it is ob- cause the volumeof householdsavings is sis: respect for individual sovereignty, vious to many people in Europe, but tremendous.It wouldalso be infeasiblefor moral obligationto solidarity,and commit- Lavignedeems it unworkablebecause the China to gradually recapitalize banks mentto democracyand the transparency EU conditions are vague and unequally throughreinvestment of profits,as Hungary of public decisionmakingprocesses. The applied.Although she did not offerher own did, because the necessary recapitaliza- initial conditions in any transforming criteria for the end of transition, Lavigne tion is too great. Instead, Lardy recom- economy determine which of these prin- concludedthat transition is not over yet. mendedthat Chinarecapitalize by injecting ciples might be problematic. Kornai ar- governmentbonds into thesebanks. gued that there is a clear need for health Gelbanswered the questionstraightaway: care reform in Hungary. Hungariansare "Transitionis overwhen the problemsand Jan Svejnar, in the first half of his lecture, currentlydemanding improvements in the the policy issues confronted by today's described the "Central Europeanmodel" quality of their healthcare system without 'transitioncountries' resemble those faced of transitionand comparedand contrasted understandingwho pays for this service. by other countries at similar levels of de- it with two other models,the "Asianmodel" He offeredseveral concretesuggestions velopment."He further statedthat no mat- and the "Russianand NIS model."Svejnar as to how the provisionof healthcare can ter how this definition is operationalized, identifiedseveral key areaswhere the tran- be changedin linewith his underlyingethi- the "transitioncountries are not there yet." sition outcomes have been systematic cal principles. across the Central European countries, Aslund measuredthe end of transitionac- chief among them being that all of these These lecturesshared several threads. All cording to the reduction of rent-seeking, countries now have functioning market speakers accounted for the initial condi- which reflectsa variety of institutionalre- economies.More interesting,perhaps, are tions, or legacies,in their analysis. In par- forms. According to his standard, Aslund the distinctive results that he identified ticular,they all mentionthe needto change concludedthat transition is over in all but amongthese countries, which so oftenare people'sattitudes toward and understand- a few countries. considereda group. Privatizationhas pro- ing of capitalismand market economies. ceeded unevenly,labor force adjustment Relatedto these changesat the individual Lardyargued that transitionin Chinawould has differedsignificantly, and various ex- level, most also mentionedthe necessity not be complete until three sectors were change rate policies have resulted in di- to developstrong civil societies, in which aggressively reformed: state-owneden- verse foreign trade performances. The institutions support both capitalism and terprises,the financialsector, and govern- second half of his lecturefocused on the democracy.The speakers generally con- mentservice provision. challengesahead for Central Europe.Al- sidered transition to occur in two stages: though other speakersvisited this theme, the first primarilyinvolves liberalization and Svejnar presentedtwo conditionsfor tran- Svejnar provided the most detail, giving stabilization,the second encompassesa sition to be over: when central planning is what Lavignemight call a "full prescription myriadof structuralreforms. They roughly abolished,and when an efficientlyfunction- for finishing transition in CentralEurope." agreed that the first stage is complete in ing market system has taken its place. The foremost challenge,Svejnar argued, many of the countries, but that progress According to these conditions, he con- is to generate and sustain high rates of and success in the second stage have cluded that transition is not over in any of growth.The buildingblocks for this growth been quite mixed. Finally, most empha- the consideredeconomies. includesuch strategies as high ratesof ef- sized the concept of transparency as an ficientlyplaced investment,human capital importantgoal in a varietyof contexts.The Kornai answered this question with the development, and establishing effective lecturesalso differed in many ways, and most precision. Transition is over when corporategovernance. perhapsthe most interesting divergence three-and only three-criteria are met: lies in the answersthat are presented. when the communistparty no longer has Janos Kornai set out to discusstransfor- monopolypower, when the dominantpart mationratherthantransition,wheretrans- The Answers: When Is Transition of the means of production is privately formation can be called the processes Over? owned, and when the market is the domi- following transitionthat improve the func- nant coordinator of economic activities. tioning of a capitalist system. An impor- Lavigne responded directly: "I think the Using these criteria, he concluded that tant part of transformation-not just in questionis unanswerable."Indirectly, how- transitionis over in Hungaryand probably formerly communistcountries but also in ever, she offeredanother reply:transition in severalother countriesas well. We can some Westerncountries-is the reformof is over for the CEE countries when they groupthese answers into three categories: the welfare state. Kornai stated explicitly become membersof the EU. This answer systemic,outcomes, and institutional.

* TRANSITION,August 1999 (C 1999 The World Bank/The William Davidson Institute Systemic.Kornai's answeris systemicin tional," fall somewhere in the middle.Al- ever,Gelb's is againmore obscure.Where that he looksat changesin the featuresof thoughthe rent-seekingthat Aslundexam- for Aslund rent-seekingidentifies a fairly theeconomicsystemstojudgewhentransi- ined arises from the systemic changes, specificsetofnecessaryinstitutions, Gelb tion is over. He makes clear that the new clearly the new market system is consid- allows that the combinationswill vary ac- system,the endpointof transition,is a mar- ered to be part of his endpoint. For ex- cordingto differentlevels of development. ket economyas defined by his specificcri- ample,the liberalizationsof domesticprices teria. Gelb's answeralso containa strong and trade representtwo measurestoward In sum,the answersthe speakersprovided systemic componentbut is more obscure eliminatingrent-seeking that are also part were very different,and the old maximthat than Kornai's.Gelb defended this obscurity of the systemicchange. However, Aslund's economistsnever agree seems to holdtrue. by arguingthat modelsof marketeconomies endpoint encompassesmore. Policiesto The question is academic, however,and vary greatly. Each transitioneconomy will abolish rent-seekinginclude the liberaliza- moreimportant than the proclamationabout have its own terminusof transition,which tion of foreign trade, the unificationof the whetherornottransitionis overisthe analy- may or may not resemblea Westernmar- exchangerate, and the eliminationof inter- sis of the problemsthese countries still face ket economy.Therefore, the indicatorseems est subsidies. He also indicated that a and the recommendationsfor whatcan and to be when the economyresembles a mar- strongcentral bank is important.With these should be done to address them. Along ketsystemratherthana communistone.In latterconditions,Aslundincluded elements these lines,the speakerstended to agree. spite of a similarityin their criteria,Kornai of institutional,or structural,change in his andGelb reached very different conclusions. criteriafor the end of transition. Postscript Komaibelieved that transition is over,at least in somecountries, while Gelbsaid none of LikeAslund, Lardy identifiedspecific insti- Clearlythe productivestructure of anymar- the countrieshas reached this stage. tutional reforms, beyond the systemic ket economy is constantly evolving, and changes,that are requiredfor the comple- thesechanges on the marginare vital for the Outcomes. In the second category,the tionof transitionin China. State-owneden- continuedsuccess of the system.I do not answersare basedon outcomes.Lavigne terprisesneed to be restructuredso thatthey meanto say that transitionis overwhen the considered, and then discarded, the cri- are forced to be profitableand desistfrom organizationof productionstops changing, terionthat countrieshave gained EU mem- accumulatinglarge bankdebts. Thefinan- butrather it isoverwhen the productivestruc- bership. While such a result is certainly cial sector, the emphasis of the lecture, turehas been transformed from its inherited dependenton systemicchanges, the sug- needsto be recapitalizedand reformedso organizationto onethat continuesto change gested criterion itself examines just the that banksoperate as effectivefinancial in- onlyslowlywith the evolution of the economy. outcomes. Svejnar also proposed a re- termediaries. The government needs to For example,when the processesof entry, sults based answer: the end of transition changeits operationas well. It needsto col- exit,expansion, and contraction act to com- is the state of an advanced market lect moretax revenuesand increaseits role pletely reshapeindustries, the economyis economy.Again, a systemiccomponent is as a providerof social servicesso that the still in transition.When these processes involved,especially in the first conditionof enterprisescan focus on their primarypro- settlesuch that they onlychange overall in- eliminating central planning, but the ulti- duction.Thesecriteria are clearlyinstitutional, dustrystructure during a long periodof time, mate condition is based on outcomes. especiallysinceLardyavoided calling forthe thentransition is over. Like Gelb's endpoints, Svejnar defined efficientfunctioning to in- privatization of state-owned enterprises, mine are obscure-because we do not clude achieving rapid and sustainable whichwouldbeamoresystemicchange. knowwhatthe long-runequilibriumwill re- rates of growthand becomingcompatible semble.We do not even knowwhether for with advancedmarket economies. In short, Gelb also highlightedinstitutional determi- anygiven country there is one, or morethan these answerssuggest that transitionwill nants. For example, he suggested that, one,possible equilibrium. Thus, this answer, be over not just when economiesoperate even with private ownership (a systemic like manyanswers to academicquestions, differently,but alsowhen they operatesuc- feature),the Czechvoucher funds (aninsti- leads to morequestions. cessfully.As a result,although Svejnar and tutional element) will make the Czech Kornai clearly agree that the countriesof economydistinctive, and thus in transition Excerptedfrom"When Is TransitionOver?" Central Europe are market economies, forsometimetocome. Heconcludedthat, Annette N. Brown, editor, pp. 1-11. Svejnar said they have at least 10 years in practice,the core systemicchanges and Kalamazoo, Michigan: WE. Upjohn In- to go, while Kornai said transition is over. the combinationof institutionalchanges go stitute for Employment Research. Used hand-in-handin movingan economy toward with permission.Annette Brown is a pro- Institutional. Aslund's and Lardy's an- its transition endpoint. Compared with fessor at Westem Michigan University swers, whichI have categorizedas "institu- Aslund's and Lardy's approaches,how- and a WDI Research Fellow.

(O1999 The World Bank/The William Davidson Institute TSANSITION, August 1999 How to Make Transition Work for Women- Gender Equality: A Wake Up Call by Sarah Nedolast

Transitionfrom a socialistto a marketeconomy in Centraland EastemEurope has sparkedwide debateabout shock therapy, gradualism,and sequencing.But what effectshave thesechanges brought on by transitionhad on thosewho live in these changingsocieties? In particular,what effects have these changes had on women? WA/hile there is always a priceto forthcomingreport by UNICEFreveals that Theseoutcomes may be explainedby a va- pay and sacrificesto be made of the 10 millionunemployed, 6 millionare rietyof events.Many large, state-owned en- during economic develop- women-this despite having achieved a terprises-which once employed many ment,the groups that pay mostdearly are higheraverage level of education. women-haveclosed during transition. Be- often overlooked. In Central and Eastern * Politicalrepresentation. Most citizens cause women are consideredhigher risk Europe,women bear the brunt of change- andmore expensive labor, finding employ- as shown by labor market, political, and mentfor men is the priority.Women might, poverty indicators. Women's position in for instance,take maternityleave and stay these societies has declined rapidly dur- at homeduring the first years after a child ing transition-a transition that largely is is born, a period during which it is against being managed by men. the law to fire them in several countries. Women are also often under pressureto Underthe communistsystem gender equal- returnto traditionalroles: staying home and ity was a nonissue-the state proclaimed taking care of the family. Under these cir- that equalityhad already been achieved. Of- cumstancesa woman'schances of being ficially,women and men were guaranteed considereda seriouscontender for a job- equal pay for equal work, equal accessto or for that matterpolitical office-are rather education, equal property and parental slim. Further,men are morelikely to benefit rights,and equalrepresentation in the politi- from retrainingor educationopportunities. cal realm.In addition,women were granted liberal maternityleave and inequalitybe- of post-communist societies are still Thesetrendsandtheprospectsforelimi- tween spouseswas abolishedby the state. unwilling to acknowledge women's natinggender discrimination were the top- Butmuch of the equalityproclaimed by the rights as an issue, and women often are ics of the recent seminar "Making the socialistsystem was equalityunder an op- not aware of their rights-nor how to de- TransitionWork for Women in Europeand pressiveregime. fend them. As a result of free elections Central Asia," hosted by the World Bank in transition economies, women on av- in Washington,D.C. The seminar brought After 10 years of transition,women in this erage hold few parliamentary seats. Al- together gender experts, scholars from region are facing many difficulties.Statis- though under the communist electoral Centraland EasternEuropean, NGO lead- tically, economic reforms have most ad- system women were assigned one- ers, and practitionersto offer suggestions verselyaffectedwomen as a social group. third of these seats, these fixed elec- to ensure that transition would work for Women's participation in the labor force tions were misleading because real women in the region. Their suggestions has declined sharply,they have lost their decisions were made in the Central includedthe following: voicein government,and they makeup an Committees and Politburos of the Com- 0 Women entrepreneursshould receive increasinglylarge percentageof the poor. mu n ist Parties-where women were more supportand easier accessto credit. * Labor force participation. Women's highly underrepresented. 0 Women should be encouraged to par- participation in the labor force has de- * Poverty.As the number of single par- ticipate moreactively in politics,especially creased in Central and Eastern Europe, ent families rise, state benefitsdecrease, by increasing their presence in national makingwomen a disproportionatelylarge and employmentopportunities fall, women legislation. percentageof the unemployed.Although are becomingthe most populousgroup of 0 Women should be encouragedto take women make upjust a little more than 50 people living in poverty in Central and part in retraining and take advantage of percent of the populationin the region, a EasternEurope. educationalopportunities.

M TANSI-n!,' August 1999 (C 1999 The WXorldBank/The WilliamDavidson Institute * Women-oriented civil organizations of management.Womencanpursuemean- women must participate in the formula- should be granted adequatesupport. ingfulparticipation in the politicalsystem. At tion and implementation of reforms. The the leastthey can participateand voicetheir best way to ensure an equal and open Democratizationand economic progress pro- concemsin civicorganizations, which are be- society is to provide for equal participa- vide womenwith the tools to overcomethe comingan importantforce in society. tion in the society's development. "invisiblebarriers" impeding their advance- ment.Opportunities existto capitalize on their Transition strategies should take into ac- Sarah Nedolast is Junior Associate for entrepreneurialskills and assumepositions count the policy effects on women, and PREM VicePresidency, the WorldBank.

World Bank/IMF Agenda

World Bank Lends Record $29 Billion loans from the IDA. The total compares The World Bank also will restarttwo other in Fiscal 1999 with $5.22 billion in fiscal 1998, and lending programs: one for reform of $5.05 billion in fiscal 1997.At the same Russia's coal industry (the Coal 2 was The WorldBank's loan commitmenttotaled time, IBRD disbursements in fiscal 1999 approved in 1997) and one for strength- $29 billion inthefiscalyearthatendedJune dropped to about half of fiscal 1998- ening the social safety nets (Social Pro- 30,withArgentina,Indonesia,China,andthefrom $4.41 billion to $2.43 billion. The tection Adjustment Loan, SPAL). So far Republicof Koreareceiving the largestpor- crisis in Russia and Ukraine and the $950million of a $1.6 billion total of these tions. The total surpassed the previous Kosovo-related developments played a programswas released.The remainderof recordof $28.6billion setin 1998.The World large role in the negative trend. IDA dis- the coalprogram has been revised intofour Banksaid that atthe sametime that itslend- bursements increased a bit: amounting 50 million-dollartranches (the first was re- ing amounts increased,the quality of its to $501 million, compared to $439 mil- mitted on July 30) and two 100 million- loans also improvedwith fewer projectsat lion in fiscal 1998. Since 1990 the Bank dollartranches. The programis scheduled risk of not reachingtheir goals. "While we has committed $38 billion to the borrow- to end next June. The remaining$250 mil- see for a secondfiscal year that the finan- ing countries in the ECA region. lion in the social safety net program will cial crisis has resultedin record lending,I be released this fall. am cheeredto see an increasein the qual- World Bank Resumes Loan Disburse- ity of loanswe have provided,"World Bank ments to Russia The Fund's Russia Analysis President James Wolfensohn explained. Duringthe 1999fiscal year the lntemational In earlyAugustthe WorldBank resumed the According to the latest Fund report on Bank for Reconstructionand Development third StructuralAdjustment Loan (SAL-3) Russia, a turnaround has occurred in (IBRD)and the InternationalDevelopment program for Russia, along with a revised 1999.Industrial output in the secondquar- Association(IDA) combined gross disburse- repaymentschedule. This was the Bank's ter was up 5 percent over the same pe- ments(transfer of money)totaled $24 billion, first cash injectionfor Russiasince August riod a year ago, the ruble has stabilized compared to nearly $25.5 billion in fiscal 1998.Ayear ago, just before crisis struck, (in recent days it has shaken again), and 1998.IDA accountsforabout 25 percentof $1.5 billionin lendingwas agreedon and a inflation was held to 2 percent in June in the loansmade by the Bank.The remaining trancheof $300 millionwas released.Un- responseto budget cuts and tighter mon- 75 percentof WorldBank loans are market- der the revisedagreement, the remaining etarypolicy. But the report also notedthat rateloans through the IBRD. $1.2 billion in the programwill be paid out "policy implementation under past pro- infourtranches($100million,$100million, grams had been disappointing and that ECA: More Loans Less IBRD Dis- $400 million,and $600 million) by the end important elements of the new program bursement in Fiscal 1999 of next year. Thefirst $100 milliontranche had been proposed before but had not has been released-the rest dependson beencarried out." Accordingto the report, Newlending commitments from the World Russia'ssuccess in implementingagreed the government'sability to strengthentax Bank to countriesof the Europeand Cen- structuralreforms such as reformingmo- collection will be critical to the new initia- tral Asia (ECA) region totaled $5.29 bil- nopolies in the energy sector, promoting tive. "Russia's fiscal problems reflected, lion for 74 projectsin 21 countriesin fiscal development of the private enterprises, to an importantdegree, the fact that many 1999. This figure includes market-rate improvingbudget management, and further large enterprises were using their politi- loans madeby the IBRDand concessional reformof the bank sector. cal influenceto avoid seizureof assets in

(© 1999 The World Bank/The William Davidson Institute TRANSITION,August 1999 X casesof tax delinquency,"executive direc- Bank loan will also support the operation academics. He replaces Mark Malloch tors concluded in the report. The board and creation of small enterprises,retrain- Brown, who recently left the Bank after foundthat Russiahad madelittle progress ing,and relocationfor minerswho are los- being appointedto the positionofAdmin- towardreforming its principaleconomic in- ing their jobs. The Bank loan will be at the istratorof the UnitedNations Development stitutionsin the pastyear,particularly in bank Bank's standard interest rate for LIBOR- Programme(UNDP). Actively involved in restructuring.It urgedauthorities to continue basedsingle-currency loans, repayablein definingand executingSweden's interna- liquidatinginsolvent banks or to referthem 20 years, includinga 5-year grace period. tional development policy for the past 16 to the bankrestructuring agency. Romania joined the Bank in 1972, and years, Mats Karlsson also took charge of since 1990 its total commitments have Sweden's cooperation programs with Russia's Envoy to the IMF and World reachedabout $3.5 billion for 26 projects. Centraland EasternEurope. To our relish, Bank Resigns in recent years he also co-authoredsev- IMF Credit to Romania-But Not to For- eral articles in Transition. MikhailZadornov, Russia's specialenvoy eign Creditors to the international financial institutions, Credit to Vietnam Uses InnovativeAp- resigned from his post on September 2, InAugust the IMFapproved a $547 million proach sayinghe will run for parliamentin the elec- creditfor Romania.The Fundhas suggested tions slated for December.Zadornov said Romaniaraise $350 million on intemational On August3 Vietnam and the WorldBank he will seek a parliamentaryseat as a can- capital marketsto pay back privatecredi- signedtwo creditagreements: one for Viet- didate of the liberal Yablokoparty. tors. Romaniahas so far managedto bor- namto use$80.5 million (Sanitation Project) row only $108 millionon the privatecapital to improvepublic health and promotedevel- Zadornovsaid he believesthe IMFwill dis- market,reports the FinancialTimes. "This opmentin three urbanareas (Danang, Hai bursethe next $640million loan installment accordis a passportallowing Romania to Phong, and Quang Ninh ) and another of to Russia as scheduled. Russia and the returnto the internationalcapital markets," $101.8million to increaseagricultural pro- IMF agreed on a $4.5 billion package of remarkedRomanian Prime Minister Radu ductivityin the MekongDelta. "The Mekong loans to be used to pay back Moscow's Vasile. IMF Deputy Managing Director projectwill benefit610,000 people,create previousborrowings from the IMF.The first StanleyFischer encouragedRomania "to 80,000new jobs, add 500,000tons to rice tranche of more than $600 million has continueto workvigorously toward obtain- production,and bringclean water to 280,000 been disbursedand conditionsfor further ing additionalprivate foreign financing in people,"World Bank DirectorAndrewSteer paymentsare beingnegotiated at present. supportof its reformprogram." The country pointedout. TheMekong Delta accounts for The outgoingenvoy said the money laun- hasthusbecomeatestcaseforthenewlMF nearly30 percentof nationalGDP, 40 per- dering scandal that has prompted U.S. bailin (as opposedto bail out)policy of forc- centof the country'soverall agricultural pro- politiciansto demandfurther checks on the ingprivate creditors to provideliquidity to fi- duction,and more than 80 percent of the use of any IMF moneybefore more lend- nancially troubled countries, rather than country'srice export. The sanitationproject ing is not likely to prevent the disburse- relyingon the IMF to do so, the Financial uses an innovativeapproach: a revolving mentof the new tranche.Zadornov denied Times notes.Ukraine is anothertest case. fund, to be administered by the City that Russiahad misusedIMF funds or that Women'sUnion, will be establishedin each his plannedresignation has anythingto do World Bank Has New Communication city to assist low incomefamilies. with the ongoing probe about IMF money Head being illegallychannelled abroad. World Bank Introduces New Loan Mats Karlsson,the WorldBank's newVice Products World Bank Helps Romania Restruc- Presidentfor ExternalAffairs and UN Af- ture Mining Industry fairs, took up his post in early September. On September1 the World Bank launched Karlsson moved to Washington from its new loan and hedgingproducts, offering OnAugust 31 the World Bank approveda Stockholm,where he was StateSecretary developingcountries more flexibility in man- $44.5 million loan to Romaniafor a Mine of InternationalDevelopment and Coop- agingtheirfinancial risksinthefollowingways: Closureand SocialMitigation project. This eration at the SwedishMinistry of Foreign 0 A fixed-spread LIBOR-basedloan will loan will help the government to perma- Affairs. He will be responsiblefor manag- provide increasedflexibility for borrowers nently close 29 unproductivecoal mines, ing the Bank'sglobal communicationspro- to tailor loan maturities and to manage with the smallest possible social and en- grams and for reachingout to the Bank's currency and interest rate risks over the vironmental cost, and to streamline the key constituencies-governmentofficials, life of the loan. Borrowers will be able to management of the mining sector. The parliamentarians, NGOs, business, and changethe currencyand fix, cap, or collar

* TRANSITION,August 1999 (©1999 The World Bank/The William Davidson Institute the interestrate of theirloan at any time M of Transition prior to the loan's final maturity. MiVIlest ne ofTr nsiio * Hedgingproducts, linked to borrowers' existingBank loans, will assistborrowers in EU expansionwill be staggered.Gunter rebalancethe budget.The currentbudget managingtheir currency,interest rate, and Verheugen,the nomineeforthe post of Eu- foresees expendituresof 7.2 billion lits. commodityprice risks through currency and ropeanCommissioner for EU enlargement, interestrate swapswith the Bank.Borrow- saidhe envisionsan expansionof the EU in Growthslows. The growthfigures for the ers transactingrisk-limiting hedges with the at leastfour stages,with the EU ready to early part of this year have been clearly Bankwould need to do so undera master acceptnew members by 2002. He notedthat weaker than anticipated,although growth derivativesagreement to besigned with the each aspirantwill be judged on individual is still expected to accelerate in the sec- Bank.Countries including Argentina, China, merits, Whichwill inevitablymean various ond half of the year.Estonia's finance min- Colombia,Hungary, Latvia, Lithuania, and datesfor joining the EU."Analysts say that istry lowered its earlier GDP growth Mexico have asked for the service, said Hungary'sposition in the accessionrace has forecast of 2.2 percentfor this year to 0.4 remainedstable, but both Poland DorisHerrera-Pol, the World Bank's man- . and the percent. The ministry also forecasts 4.1 ager for marketing and client outreach in Czech Republic have fallen behind. The percentGDP growthfor next year. In June financial products.Since 1996 Bank bor- Czech Republic is behind becauseof de- the Latviangovernment gave its GDPfore- rowershave selectedsingle currency loan layedstructural reforms, poorgrowth expec- cast for this year as 2 percent. Now the termsfor morethan 95percent of theirBank tations,and slowprivatization of the banking Latviancentral bank expectsGDP growth loan commitments.Borrowers also con- sector,while Polandhas grappledwith agri- of between 1-2 percent. Lithuania's fi- verted$67 billionequivalent (58 percent)of culturaland environmentalissues. nance ministryhas adjustedits GDP fore- castto 1-1.5 percent,and the economy theircurrency pool loansto singlecurrency cattX-. ecnt n h cnm their cunderrhencypooloanstofsingler cuency Central and Eastern termsunder the conversionoffer that con- Europe ministrynow says 1.3-1.6 percentis likely. PreviousGDP growthforecasts for this cludedJuly 1,1998.The World Bank's New Baltics Products Website is located at http:// year were around4 percent. www.worldbank.orgffps. Rising public sector deficits. A de- crease in economicactivity in the first half Unempoymente isastll high.iSties basedon International Labour Organization Successful Donor Conference for of the year contributed to higher public (ILO) calculationmethods show thatunem- Kosovo sector deficits in all three Baltic nations. ploymentaveraged 9.6 percent of the la- g In Estonia the state's fiscal shortfall bor force in Estonia in the second quarter Officialsfrom 100 donor countriesand in- reached 1.2 billion kroons(about $80 mil- of 1999.Also using ILO methods,figures ternational organizations pledged suffi- lion) for the first six monthsof this year,the for Latviafrom November 1998 indicated cientfinancial support to meet about$560 equivalentof 1.6 percentof Estonia'sGDP an unemploymentrate of 13.8 percent. million of urgent human needsand imme- in 1998. The recently approved supple- Similarly,Lithuanian unemployment in May diate reconstructionexpenses in Kosovo mentary budget reduces government was 13.1percent. until the end of this year. The European spending this year by 1 billion kroons. Commissionand the World Bank, which * In Latvia the state deficit in the first half Czech Republic jointly chairedthe first donors' conference of this year was reported at 45.6 million for the war-torn province on July 28, said lats ($77 million), or 1.2 percent of 1998 Government is preparing to sell its pledges made yesterday added up to GDP. The overall public sector deficit for stakein KomercniBanka, the country's $2.08billion, including funding already dis- the first halfwas 67.3 millionlats. The gov- largest bank.Although Komercni Banka, bursedduring 1999.The next donors'con- ernmentdecided to cut state expenditures with total assets of 402 billioncrowns ($12 ference in Octoberwill considerKosovo's by 30 million lats this year. The finance billion),dominates corporate lending in the overall reconstructionneeds. The donors ministry now forecasts a fiscal deficit this Czech Republic, its loan portfolio is said they would give $200 million for im- year of approximately3.5 percentof GDP. plagued by nonperforming assets. The mediatehumanitarian aid and $45 million * In Lithuania the state deficit in the first bank lost 4.475 billion crowns in the first to meetthe costs of the UN in setting up a half of this year was 394 million lits ($ 87 halfof this year.If not for the government's civil administrationand payingthewages million), or 0.9 percent of 1998 GDP. recenttransferof23 billioncrowns of non- of publicservants like customs officers and Lithuania planned a balanced budget for performing loans from Komercni to teachers.The EU said it would pick up the this year, but finance minister Jonas Konsolidacni Banka-a state-owned $300 million needed until the end of the Lionginas now says that cuts of at least bank set up to deal with bad debt- year to help rebuild damagedhousing. 800 million lits are called for in order to Komercni'scapital adequacy ratio would

© 1999 The World Bank/The William Davidson Institute TRANSITION,August 1999 have fallen to about 4 percent,far short of count deficit,as comparedwith 75 percent AIDS casesexploding. Vadim Pokrovskii, central bank requirements.The govern- in 1998. headof the RussianResearch Centerforthe ment intendsto subscribe to at least half PreventionofAIDS, said in July that a lack of the 9.5 billion crowns capital increase, CIS of preventionand publiceducation in Rus- doubling Komercni's share capital and sia has led to a surge in the number of boosting the state's stake in the bank to Higher industrial production in most people infected with the HIV virus. more than 50 percent. This would make CIS countries.The Commonwealthof In- Pokrovskii said there has been a 12-fold the bank moreattractive to potentialinves- dependentStates (CIS) Interstate Statis- increase in the number of HIV-infected tors as they would gain full control of tics Committee reports that eight CIS peopleintheMoscowareaduringthefirst Komercni.A group of local minorityshare- states increased industrial output in the six monthsof this year,compared with the holdersin the bank have challengedthese first halfof 1999.Compared to the first half same period in 1998. He also said that plans.Many analysts in Praguebelieve that of 1998,industrial output rose in Tajikistan Russia lacks the money to keep the dis- Komercni'sloan portfoliowill needfurther by 7.9 percent, in Belarus by 7.0 percent, ease from spreadingand that the disease restructuringnext year.By someestimates, in Uzbekistanby 5.6 percent,in Russia3.1 most commonly passes into the hetero- the bank's problemloans will fall between by percent, in Armenia by 2.8 percent, in sexual population via drug-using prosti- 45 billion to 50 billion crowns, of which Azerbaijan by 2.0 percent,in Georgia by tutes. The Health Ministry reported that some 70 percent are irrecoverable. 0.6 percent,and in Ukraineby 0.2 percent. almost 16,000 HIV-positive cases were Industrialoutput was down in Moldova by registeredin the country as of last month. Poland 15.2 percent, in the Kyrgyz Republic by 10.0 percent, and in Kazakhstanby 4.1 Asia's Reforming Economies Poland's current account deficit wid- percent. China ens. Poland, Eastern Europe's smooth- est-sailingeconomy, is hitting rough seas, Russia China's parliament approves two according to the Wall Street Journal. growth-boostingeconomic measures. Poland'scurrent account balance showed Newinvestment law. In mid-Julyanewfor- Incometaxexemptionfor bankdeposit in- a deficit of $1 billion for July, indicating eign investmentlaw came intoforce in Rus- teresthad beenrepelled in China.The new that slow economic growth in Germany sia, intendedto protectinvestors' rights and tax on savings interest is aimed at boost- and Italy and economic collapse in Rus- guaranteethat tax obligationswill not sud- ing domestic consumption and ending a sia have dealt a heavy blow to Polish ex- denlychange. It defines foreign investment as 22-monthslide in retail pricesthat is bruis- ports. If this trend continues, the current a projectwithat least1 billionrubles ($41 mil- ing China's producers. The tax measure account deficit could amount to between lion) offoreign investment orwhen a foreign is intendedto discouragesavings and pro- 6-7 percentof GDPfor 1999,which would investorhas at least100 million rubles in the pel some of the 5,900 billion yuan (about be the nation's highest ever. Economic chartercapital ofa company The lawdoes $72 billion) of private savings into the growthis slowing,FDI is lagging,and the not apply to foreigninvestors with stakesin economy.The tax will also amass revenue central government's budget deficit Russianbanks or portfolioinvestors. The law for increasedunemployment subsidies. A threatens to overshoot its 1999 target. also definesthe rights of foreign investors, special 60 billion yuan bond issue will fi- Overhaulof the coal miningsector and its freezestax ratesfor investmentprojects for nance a wide-ranging spending program health care and pension systems are sevenyears,andprohibitschangestotaxor in infrastructure,technology, and environ- proving costly. Those expenses have customslawsthathurtinvestors'profitsbyre-mental protection projects aimed at re- pushed the central government's 1999 gionsorthefederalgovernment. versing the sharp drop in domestic budget deficitto 97 percentof its planned investment.Fixed-asset investment rose targetfortheyear-2.15 percentof GDP- The decline in Russia's population just 3.8 percent on the year in July, down atthe end of July.Domesticgrowth has also shows no sign of ending.With a further from 22.7 percentgrowth in the first quar- slowed. While Poland's finance ministry fall of upto 8 millionpeople expected by the ter of the year. Dampened by dwindling predicts that GDP will show 3 percent year2016,the WashingtonTimes reports inflows of foreign investment, weak ex- growthin the secondquarter, that still lags that Russia'spopulation, now at around 146 ports,and fallingprices, China'seconomy behindthe 5.3 percentincrease the coun- millionpeople, has been in steadydecline grew just 7.1 percent in the second quar- try enjoyedduring the earlier period. FDI for the past decade-a trend that will likely ter of this year, down from 8.3 percent in was down48 percentin July,compared with continue.Experts blame factors such as a the first quarter. In the past three months July of 1998.If that trend continues,FDI in drop in medical standards,poor nutrition, Beijinghas cut interest ratesfor the fourth Polandwill coveronly halfof its current-ac- and fewerwomen giving birth. time since March 1998.

i TRANSITION,August 1999 ©11999 The World Bank/The William Davidson Institute New Books and Working Papers The Macroeconomicsand Growth Group regrets that it is unable to provide the publications listed.

World Bank Publications ance tend to be more market-based,even [email protected] authors may after controllingfor income. be contacted at [email protected], Toreceive ordering and price information * Countrieswith a French civil law tradi- ademirguckunt@worldbankorg,orrlevine for World Bank publications, contact the tion, poor accounting standards, heavily @csom.umn.edu. World Bank, P.O.Box 7247-8619,Phila- restrictedbanking systems, and high infla- delphia,PA 19170, United States,tel: 202- tiongenerally tend to have underdeveloped ConstantineMichalopoulos, Developing 473-1155, fax: 202-676-058, email: financialsystems, even aftercontrollingfor Country Goals and Strategies for the [email protected], Internet: http:// income. Millennium Round, WPS 2147, July www.world bank.org or http.//www.world To order Kan Labnie,Room MC3-456,tel: 1999, 41 pp. bank. org/html/dec/Publications/Work 202-473-1001,fax: 202-522-1155,email: papers/tranecon.htm, or visit the World [email protected] authors maybe Many developingcountries have been re- Bank bookstore in the United States, at contactedatademirguckunt@worldbankorgluctant to participatein multilateraltrade 701 18th Street,NW, Washington,DC, or or [email protected]. negotiationsalthough they can gain sig- France, at 66 avenue d'lena, 75116Paris. nificantbenefits from a broaderWTO Mil- Jean-PaulAzam,Shantayanan Devarajan, lenniumRound of negotiationsonce they Working Papers and StephenA. O'Connell, Aid Depen- develop proper strategies. They should dence Reconsidered,WPS 2144, July embraceindustrial tariffs and trade-related Asl Demirgu,c-Kunt and Ross Levine, 1999, 14 pp. aspects of intellectual property rights, Bank-Basedand Market-BasedFinan- trade-related environmental issues, and cial Systems: Cross-Country Com- Whenforeign aid underminesinstitutions, government procurement. Liberalization parisons,WPS 2143, July 1999,68 pp. countries can become aid-dependent, of their own trade with realistic transition even if donorsand recipientshave the best periods and technical assistance to ad- In bank-basedfinancial systems banks play intentions.When foreign aid undermines dress constraintson their institutionalca- a leading role in mobilizingsavings, allo- institutional development, aid recipients pacity in exchange for improved access cating capital, overseeingthe investment can exhibit the symptoms of aid "depen- to the markets of their trading partners is decisionsof corporatemanagers, and pro- dence-benefiting from aid in the short the only way to maximize benefits from viding risk management vehicles, as in term but damaged by it in the long term. multilateraltrade negotiations. Germanyand Japan. In market-basedfi- Toorder: HedySladovich, Room MC2-609, To order: Lili Tabada, Room MC3-333, nancialsystems securitiesmarkets share tel:202-473-7698,fax: 202-522-1154, email: tel: 202-473-6896, fax: 202-522-1159, centerstage with banksin gettingsociety's hsladovich@worldbankorg. The authors email: Itabada@worldbankorg. The au- savingsto firms,exerting corporate control, maybecontacted atjean-paul.azam@univ- thor may be contacted at cmichalopoulos and easing risk management,as in En- tlsel.fr, [email protected], or @worldbank.org. gland and the United States.What are the [email protected]. relativeadvantages and disadvantagesof Martin Ravallion and Michael Lokshin, each of these systems? Thorsten Beck, Ross Levine, and Asli Who Wants to Redistribute?Russia's Demirgu,-Kunt,A New Databaseon Fi- Tunnel Effect in the 1990s, WPS 2150, Analyzingnewly collected data on a cross- nancial Development and Structure, July 1999, 26 pp. section of roughly 150 countries, some WPS 2146, July 1999,63 pp. clear patternsemerges: Few Russiansexpected rising living stan- * In higher income countries,stock mar- A new database of indicators that mea- dards in the 1990s; most expected a de- kets become more active and efficient sure the size, activity,and efficiency of fi- cline, so there was strong demand for than banks. Thus financial systems tend nancial intermediaries(nonbank financial redistribution,even amongthose currently to be more market-based. institutions)and capitalmarkets canshow well off but fearful of the future. Some 72 * Countrieswith a common law tradition, the financial development and structure percent of the 7,000 adults surveyed in strong protection for shareholder rights, across countriesand over time. October 1996favor governmentaction to good accountingstandards, low levels of Toorder: Kari Labrie,Room MC3-456,tel: reduce incomes of the rich. But the other corruption, and no explicit deposit insur- 202-473-1001,fax: 202-522-1155,email: 28percentwerenotonlythecurrently"rich."

(D1999 The World Bank/The William Davidson Institute TRANSITION,August 1999 Women tend to favor redistributionmore Maurice Schiff, Will the Real "Natural governors. They will be looking for evi- than men do. Trading Partner" Please Stand Up? dence of accountabilityin the form of the To order: Patricia Sader, tel. 202-473- WPS 2161, August 1999,25 pp. rule of law and transparencyin the form of 3902, fax: 202-522-1153,email: psader To order:Maria Kasilag, Room MC3-321, reliable publicinformation. @worldbank.org.MartinRavallion maybe tel:202-473-9081, fax: 202-522-1159,email: To order: Hedy Sladovich, Room MC2- contacted at [email protected]. [email protected] 609, tel: 202-473-7698, fax 202-522- be contactedat mschiff@worldbankorg. 1154, Internet address: hsladovich Francisco Ferreira,Giovanna Prennushi, @worldbank.org. The authors may be and Martin Ravallion, Protecting the Estelle James, Coverage under Old- contacted at [email protected] or Poor from Macroeconomic Shocks, Age SecurityPrograms and Protection [email protected]. WPS 2160, August 1999,24 pp. for the Uninsured-What Are the Is- sues? WPS 2163, August 1999, 21 pp. Simon Johnson, Daniel Kaufmann, and To minimize the harmful impact of mac- Pablo Zoido-Lobat6n,Corruption, Public roeconomic shocks on the poor, govern- The shift toward social security systems Finances,and the UnofficialEconomy, ments and civil society need to be with a tighter link between benefits and WPS2169,August1999,51 pp. prepared for a flexible response well contributionswill make suchsystems more ahead of the crisis, primarily setting up fiscally sustainable.But to protect the un- Analyzinga sampleof 49 developing(Latin an effective permanent safety net, com- insuredand underinsured,such programs American),transition, and industrialecono- bining a workfare program with targeted should be complementedby bettersocial mies,the authorsconclude that ineffective transfers and credit. Once a crisis has assistance programs for low-income and discretionaryadministration of tax and happened,the following should occur: groups, primarily workers who spend regulatoryregimes, as well as corruption, * Macroeconomicpolicies should aim to much of their lives in agricultureor the in- are responsiblefor increasesin the size of achievestabilization goals at the leastcost formal sector (often self-employedor in the unofficialeconomy-notjust highertax to the poor. Temporaryreduction in aggre- small firms) and women who, having rates.And countrieswith a larger unofficial gate demandis inevitable but as soon as worked mostly in the household,expect to economytend to grow moreslowly. a sustainableexternal balance has been be supportedby a familysystem that may reached and inflationary pressures have fail them in old age. WealthyOECD economies and someEast- been contained, macroeconomic policy To order:Marianne Leenaerts, Room G2- em Europeaneconomies find themselves in should be eased (interest rates reduced 030, tel: 202-458-4264, fax: 202-676- the "goodequilibrium" of relativelylow regu- and efficient public spending restored,to 0961,email: [email protected]. latoryandtaxburden(notnecessarilylowtax help offset the worst effects of the reces- The authormaybe contacted at ejames3 rates), sizablerevenue mobilization, good sion on the poor).A fiscal stimulusdirected @worldbankorg. rule of law and controlof corruption,and a at labor-intensiveactivities (such as build- smallunofficial economy. Several countries ing rural roads) can combine the benefits Martha de Melo and Gur Ofer, The Rus- in LatinAmericaand the formerSoviet Union of growthwith thoseof incomesupportfor sian City in Transition: The First Six exhibitcharacteristicsconsistentwitha"bad poor groups. Years in 10 Volga Capitals,WPS 2165, equilibrium:"the discretionaryapplication of * Key areas of public spending-espe- August 1999,58 pp. heavyregulatoryandtaxburdens,theweak cially investments in health care, educa- ruleof law,heavy bribery, and an active unof- tion, rural infrastructure,urban sanitation, While authors welcome the relative suc- ficialeconomy. and microfinance-should be protected. cess of reform in majority of 10 regional Toorder: Diane Bouvet, Room G2-136,tel: * Efforts should be madeto preserve the capitals along the Volga River,they point 202-473-5818,fax: 202-334-8350,email: social fabric and build social capital. out that a major difficulty facing Russian [email protected] authors may * Sound informationshould be generated cities is the cost of subsidies to housing be contactedatdkaufmann@worSdbankorg on the welfare impacts of the crisis. and utilities. Real estate constitutes a orpzoidolobaton@worldbankorg. To order: PREM Advisory Services, major expenditurecategory for local gov- Room MC3-825, tel: 202-458-7736,fax: ernment rather than, as in most western Gudrun Kochendorfer-Luciusand Boris 202-522-1135, email: premadvisory@ cities, a majorsourceof revenue.With the Pleskovic, (eds), DevelopmentIssues worldbank.org.The authors maybe con- credibilityof Russia'sfederal government in the 21st Century , Villa Borsig Work- tacted at [email protected], at an all-time low, foreign investorshave shop Series 1998,in cooperationwith the [email protected], or mraval to rely on the competence and reliability German Foundationfor InternationalDe- [email protected]. of local leaders, especially mayors and velopment (DSE), 1998, 210 pp.

* TRANSITION,August 1999 C 1999 The World Bank/The William Davidson Institute IMF Publications To order, contact CEUIOSI Publications of resources based on prices of unre- Office, H-1051 Budapest, Nadoru. 9, strained free markets increase the effi- Toorder, contact IMF PublicationServices, Hungary, tel: 361-327-3222, fax: 361- ciencyof the system and leads to general 700 19th Street, NW, Washington, DC, 327-3820, email: [email protected], equilibriumof competitive markets. It as- 20431,UnitedStates, tel: 202-623-7430, fax: Intemet:http://www.ceu.hu./ sumesthat marketsare mereaggregation 202-623-7201,email: publications@imforg, and interactionof maximizingindividuals lntemet:http:/Avwwdmforg. Andras Bozoki, (ed.), Intellectuals and with stableand givenpreference functions, Politics in Central Europe, 1998. thus ignoringasymmetric anrd incomplete MichaelMussa and MiguelA. Savastano, informationand regard institutionalframe- The IMF Approachto EconomicStabi- TiborVarady,John J. BarceloIlIl, and Arthur work as given. lization,WP/991104, 1999. von Mehren, InternationalCommercial 0 Institutional economics.In this sys- Arbitration-A Transnational Perspec- tem economic actors are conceivedof as Torbjom Becker, Public Debt Manage- tive, 1999. individualswith boundedrationality and in- ment and Bailouts, WP/99/103, 1999. complete informationwho do not take all alternatives and consequences into ac- Chris Jarvis, The Rise and Fall of the count. This results in loss of economic Pyramid Schemes in Albania, WP/991 Edward Elgar Publications value. Institutionscan serveas "surrogates 98, 1999. of rationality."Compatibility between lay- To order,contact Edward Elgar Publishing, ers of the institutionalsystem-including JoannesMongardini and JohannesMuller, 136West Street, Suite 202, Northhamptom, basic cultural norms and traditions in a Rachet Effects in Currency Substitu- MA 01060, United States, tel: 800-390- society-is a constraint that has to be tion-An Application to the Kyrgyz 3149,Intemet: http.//Aww.ve-elgar.co. uk. or taken account in a transformingenviron- Republic,WP/991102, 1999. Glensanda House, Montpellier Parade, mentthrough coordination and motivation. Cheltenham, Glos, GL50 1UA, United * Evolutionaryeconomics. This theory Joshua Charap and Christian Harm, In- Kingdom, tel: 44-1242-226934,fax: 44- rejects the principles of the neoclassical stitutionalized Corruption and the 1242-262111,email: [email protected] model and believes in heterogeneity of Kleptocratic State, WPI99/91, 1999. behavior-different economicagents may Attila Agh, Emerging Democracies in behavedifferently under the same circum- Matthieu Bussiere and Christian Mulder, East Central Europe and the Balkans, stances. Economic agents follow certain External Vulnerability in Emerging 1998, 368 pp. decision routines-established routines MarketEconomies-How High Liquid- leading to pathdependency, or a continu- ity Can Offset Weak Fundamentals HorstBrezinski, Egon Franck, and Michael ity of firm behaviorin a changingeconomic and the Effects of Contagion, WP/99/ Fritsch, (eds.), The Microeconomicsof environment. This suggeststhat a firm in 88, 1999. Transformationand Growth, 1998,288 transitioncan hardlyfollow any single op- pp. timal strategy to overcome its problems. Liang Hong, Do Hong Kong SAR and The imprintedroutines of the socialistpast China Constitutean OptimalCurrency Transformationoften is treated in a cook- can constitute a considerable bottleneck Area? An EmpiricalTest of the Gener- book manner rather than as a game of in an open economy. Microeconomic alized Purchasing Power Parity, WP/ chess-that is step-by-stepprocedure with analysis can play a major role in identify- 99179,1999. action, evaluation,and feedback. Conse- ing routinesthat can copewith enterprises' quently,during transition the institutionaland required change. Andrew Berg, Eduardo R. Borensztein, economicconditions of the targetmodel are Ratna Sahay, and Jeromin Zettelmeyer, not clear.Economic institutions with formal TerryCox and BobMason, Social and Eco- The Evolution of Output in Transition and informalrules and norms were devised nomic Transformationin East Central Economies-Explaining the Differ- to shapehuman interaction and help solve Europe-institutions:Property Relations ences, WP/99/73 economic problems.The essays in this and SocialInterests, Studies of Commu- book show a variety of approachesto un- nism in Transitionseries, 1999, 230 pp. derpineconomic analysis of transformation from a microeconomicpoint of view. Governmentsof the CzechRepublic, Hun- Central European University * Neoclassical theory. This theory is gary,and Polandhave experiencedprob- Publications basedon the assumptionthat reallocation lems in implementingeconomic reforms,

© 1999 The World Bank/The William Davidson Institute TRA-\smoN,August 1999 m which have had to be weighed againstin- to be a mixedblessing, with its adverseef- process. The strongestfinancial standing creasing inequalities,growing unemploy- fectson inflation,the exchangerate and the and the fastest growthhas been recorded ment, poverty, and the discontent of the currentaccount, and difficultiesto contain by foreign-ownedcompanies, although in public. Electoratesin Hungaryand Poland disturbancesresulting from reversalsof the most casesthose were the flagship,state- turned their backsto the liberaldemocrats flows. This book investigatesrecent expe- owned companies before privatization. and national conservatives in the mid- riencesin Centraland EasternEurope and Government officials were less efficient 1990s and broughtto powerthe socialists, contraststhose with experiencesfrom Latin "agents"at selling companies than man- initially reform communists. Four years America and EastAsia. It concludesthat agers of the firms were. Privatizationwith later,right-of-the-center parties formed the severalfeatures are similar.However, cer- the ESOP-typeprivatization is mixed. In governmentin bothcountries. In the Czech tain unique characteristicssuch as data most larger companiesworkers could not Republicthe liberal-conservativecoalition limitationsand the fragility of the banking functionas ownersso the companieswent graduallysplit upand the social democrats and financialsystems compound the prob- bankrupt or were sold to the managers. were able to form a minority government. lems faced by policymakersin Centraland These countries cannot afford to pay the EasternEurope. TonyVerheijen (ed.), Civil Service Sys- high cost of social support structures and tems in Central and Eastern Europe, are attemptingto reform pension, health, ChristianHelmenstein (ed.), Capital mar- Civil Service Systems in Comparative and other social support reforms. This is kets in Central and Eastern Europe, Perspectiveseries, 360 pp. the most important"unfinished business" 1999, 256 pp. of the transformationprocess. A comprehensivecomparative analysis of The first part of the book presents case the emergingcivil service systems in nine DavidA. Dyker (ed.), Foreign Direct In- studieson the transition processas expe- Central and East European states pro- vestment and TechnologyTransfer in riencedin elevencountries. It outlinesthe vides insight into the emergingpatterns of the FormerSoviet Union, 1999, 208 pp. role of monetarypolicy in macroeconomic administrativedevelopment in the region. stabilization,the characteristicsof banking Saul Estrin, Marko Simoneti, and systems,the transfer of corporateowner- Daniel Vaughan-Whitehead,Albania in Andreja Bohm (eds.), The Gover- shipthroughprivatization,thedynamicsof Crisis-The Predictable Fall of the nance of Privatization Funds: Expe- exchange-relatedtrading, and the impor- Shining Star, 1999, 384 pp. riences of the Czech Republic, tanceofintemationalfunding.In thesecond Poland, and Slovenia, 1999, 208 pp. parttheauthorspresentanin-depthanaly- At the beginning of the 1990s the first sis focusing on specific issues including encouragingresults on GDP growthcom- Privatizationinvestment funds are the key marketefficiency, financial risk, a compara- binedwith the fulfillmentof internationalre- feature of mass privatizationprograms in tive assessmentof centralbank indepen- quirementsled manyto believethatAlbania transition economies. This book surveys dence, foreign debt settlement, and the wasashiningstarofeconomicdevelopment mass privatizationprograms in the Czech privatizationprocess. in Centraland EasternEurope. But in 1997 Republic, Poland, and Slovenia,comple- thisprogress was reversed by unprecedented mentedwith extensiveempirical analysis. Gernot Hutschenreiter, Mark Knell, and institutional,political, and socialturmoil lead- SlavoRadosevic, Restructuring Innova- ingto a spiralof violenceand chaos.The au- Janos Gacs, Robert Holzmann, and tion Systems in Eastern Europe,1999, thor provides a comprehensiveeconomic MichaelL. Wyzan(eds), The MixedBless- 300 pp. analysison Albaniaand identifiesthe major ing of Financial Inflows-Transition reasonsfor the 1997explosion. The collapse Countriesin ComparativePerspective, lvan Major (ed.), Privatizationand Eco- of the pyramid scheme was just the last Jointpublication with InternationalInstitute nomicPerformance in Centraland East- drop-the breakdownof the industrialproduc- for Applied System Analysis, I IASA, ern Europe-Lessons to Be Learntfrom tion,failure of massprivatization, paralysis of Vienna, 1999, 253 pp. Western Europe, EuropeanAssociation thebankingsystem, and rampantpovertyfu- for ComparativeEconomic Studies series, eleddiscontent to breakingpoint. Successfulmacroeconomic stabilization in 1999,390 pp. Centraland Eastern Europeancountries has encouraged inflowsof foreign capital Comprehensiveanalysis of the impact of badly neededto promoteeconomic devel- privatizationin Bulgaria,Estonia, Hungary, Publicationsof FederalInstitute for Rus- opment. Strikingly,these countries have and Poland, the book sheds new light on sian, East European and International found capital inflowsin their variousforms the achievementsand shortcomingsof that Studies Cologne, Germany, Berichte

* TRANSITION, August 1999 C) 1999 The World Bank/The William Davidson Institute des Bundesinstituts fur Ostwissen- 10 St. James's Square, London SWIY Wojciech W. Charemza and Geomina schaftliche und Internationale Studien 4LE, United Kingdom, tel: 0171-957- Popescu-Turlea, Internal Foreign Ex- (BIOSt) (in German,with Englishsumma- 5700, fax: 0171-957-5710,Intemet: http:/ change Markets and Hyperinflation ries) hwww.ria. org. duringTransition: The Case of Roma- nia, No. 99/5, March 1999,22 pp. Toorder, contact BlOst, Lindenbornstr. 22, Neil MacFarlane,Western Engagement D-50823 Koln, Germany, fax: 049-221- in the Caucasusand CentralAsia, Cen- 5747-110,email: administration@biostde, tral Asian and Caucasian Prospects, Intemet:http://wwwbiost.de/biopubl.htm. 1999, 72 pp. Other Publications

Aleksej Surubovic and Natalija Usakova, Richard Pomfret, Central Asia Turns Edgar L. Feige and Katarina Ott (eds.), The Presence of the Russian Economy South? Central Asian and Caucasian Underground Economies in Transi- in the CIS. Part I: Material Production; Prospects, 1999, 46 pp. tion: Unrecorded Activity, Tax Evasion, Part II: Financial Relations, No.9 and 10, Corruption, and Organized Crime, February1999, 24 pp. and 30 pp. Ashgate, United States, 1999,336 pp. To order: Ashgate, Old Post Road, Heiko Pleines, The Post-Soviet Crisis University of Leicester Publications Brookfield, Vermont 05036, United of the Russian Coal Industry, No 19, States, tel: 800-535-9544,fax: 802-276- May 1999,34 pp. To order, contact Faculty of Social Sci- 3837, email: [email protected]. ences, Department of Economics, Uni- Ognian Hishow,The Russian Economy versity of Leicester LEI 7RH, United RichardJ. Hunter,Jr., and LeoV. Ryan, From after the Farewells to the Reformers. Kingdom, tel: 0116-252-2892,fax: 0116- Autarchyto Market:Polish Economics Economic Policy Stagnation and the 252-2908. andPolitics, 1945-1995, Praeger Publish- Debt Trap, No 22, June 1999. ers, UnitedStates, 1998, 304 pp. Zbigniew Kominek, Stable Distribu- To order: De Paul University,Department tions and Returns on the Warsaw of Management, 1 East Jackson Boule- Stock Exchange: The Minimum Chi- vard, Chicago, Illinois 60604-2287, fax: SIGMA Publications Square Estimation, No. 99/11, April 312-362-6973. 1999, 37 pp. To order, contact Head of Publications Inflation Targeting: Lessons from the Service, OECD, 2 rue Andre-Pascal, CorneliaScutaru and Adrian Ghita,Chaos International Experience, Princeton 75775 Paris Cedex 16, France, tel: 331- and Order in Transition: Social Costs UniversityPress, January 1999. 4524-7900, fax: 331-4524-1300, email: (Inflation, Unemployment) and Ex- To order.,Princeton University Press, 41 [email protected],/ntemet: http./ changeRate Policy.Case of Romania, William Street, Princeton, New Jersey /www.oecd.org/pumalsigmaweb. No. 99/9,April 1999, 18 pp. 08540, United States, tel: 609-258-5714, fax: 609-258-1335. SustainableInstitutions for European RobertLensink and Elmer Sterken,Capi- Union Membership, SIGMA Paper no. tal Market Imperfections,Uncertainty, PiotrJasinskiand HelenLawton Smith, (eds.), 26, 1998,26 pp. and CorporateInvestment in the Czech EnvironmentalRegulation in Transform- Republic,No. 99/8, March 1999,21 pp. ing Economies: The Case of Poland, Public Opinion Surveys as Input to Ashgate,United States, 1999, 384 pp. Administrative Reform, SIGMA Paper Tomasz Kopczewski, Productivity To order: Ashgate, Old Post Road, no. 25, 1998, 106 pp. Growth in the Polish Banking Sector: Brookfield, Vermont 05036, United Bootstrapping Dea-Based Malmquist States, tel: 800-535-9544,fax: 802-276- Productivity Index Approach, No. 99/ 3837, email: [email protected]. 7, April 1999, 37 pp. The RoyalInstitute of InternationalAf- RussellR. Miller,Selling to NewlyEmerg- fairs Publications Constantin Ciupagea, Rigidities of the ing Markets, Greenwood Publishing LaborMarket in a TransitionEconomy: Group Inc., United States,1998, 288 pp. To order, contact The Royal Institute of The Case of Romania, No. 99/6, April To order: Greenwood Publishing Group, International Affairs, Chatham House, 1999, 44 pp. Inc., 88 Post Road West, PO. Box 5007,

© 1999 The WNAorldBank/The William Davidson Institute TRANSITION,August 1999 * Westport,CT06881-5007, United States, prisesinto holding companies. Reviewed by tionfor anycapitalist market economy-the tel: 203-226-3571, fax: 203-222-1502, MariaAggestam, School of Economicsand financialsector. Part IV is dedicatedto ag- lntemet:http://www.greenwood.com. Management, Lund University Sweden, riculture,and Part V covers reform of the email:maria.aggestam @fek.lu.se energysector, sometimes perceived as the Peter S. Rashish(ed.), A New Approach Achilles'heel of the Ukrainianeconomy. for the TransatlanticEconomic Partner- Axel Siedenbergand Lutz Hoffman,(eds.), ship: Report of the EuropeanInstitute Ukraineat the Crossroads:Economic Whateverthe macroeconomicfigures, the 8th Annual Transatlantic Seminar on Reforms in International Perspective, major transformation still confronting Trade and Investment, November4-5, Physica-Verlag Heidelberg, New York, Ukraine is a change in the mindset of 1998,The EuropeanInstitute, 1999, 82 pp. 1999,437 pp. people-the perception that while the To order: The European Institute, 5225 movefrom socialismto a marketeconomy Wisconsin Avenue, NW, Suite 200, Partl, a macroeconomicreview of the trans- can indeed be accomplished,short-term Washington, DC 20015-2014, tel: 202- formationprocess, provides a comprehen- approach in politics leads to proliferation 895-1670, fax. 202-362-1088, email: sive overviewof economicdevelopment in of inefficientstructures and policies rather [email protected]. the EastEuropean and CIS transformation than to their eradication. [See also lead countries. John Odling-Smee and Oleh article in this issue.The Editor]. Maria Romanowska,Michal Trocki, and Havrylyshynidentify three countrycatego- Bogdan Wawrzyniaket (eds), Financial ries:sustained growth, artificial growth, and WorldDisasters Report 1999, International Groups in Poland, (Grupy kapitalowe zero growth,with Ukrainebelonging to the Federationof RedCross and RedCrescent w Poisce), Difin Publishing,Warsaw, Po- latter.Part II covers issuesthat have been Societies,Switzerland, 1999,198 pp. land, 1998.491 pp. neglectedfor too long in the transformation To order: Edigroup, Case postale 393, debate: institutionalchange as a precon- 1225 Chene-Bourg Switzerland, tel: Financial groups increasingly shape dition for any reform. Part IlIl addresses 4122-348-4428, fax: 4122-348-4422, rules, institutions, beliefs, and norms at structuralchange in what is the key institu- email: [email protected]. home and globally. The book provides a comprehensiveoverview of the formation and governanceof financialgroups in Demographic Survey Poland. State monopolies were the old monsters;since their weakening and de- mise in the early 1990s,financial groups are replacingthem. They are neithercom- OldestMa in theWorld pletelyprivate nor public. As to theirscale, What'syour concentration,historical heritage, con- secret? nections with the government, and con- trol of their own activities, they markedly differ from their westerncounterparts. I had my stuffedon my 25th Maria Romanowska's paper, "Financial Group Strategiesin Poland,"explores the C dangersof recreatingthe old monopolistic monstersinto new formations. Poland should set up lobby groups representingvarious branchesof Poland'sindustry in orderto in- | fluencedecision-making bodies in the Euro- peanUnion, argues Krzysztof Popowicz in his essay,"Polish Financial Groups in Negotia- tions with the EuropeanUnion." Wieslaw Grudzewskiand HelenaHejduk in theirstudy "TheHolding Company as Instrumentfor Re- * structuringKey Industry in Poland"challenge the idea of restructuringmajor Polish enter- From the WorldPress Review.

* TRANSITION, August 1999 D 1999 The W0orldBank/The William Davidson Institute Bibliography of Selected Articles Central and Eastern Europe Romania and Bulgaria: The Tortoise velopment Economics (Netherlands) and the Hare. Economist (United King- 59:337-64,August 1999. Buch,C., R. P.Heinrich, and D. Piazolo.Fi- dom) 352: 40, August 7-13, 1999. Elec- nancialFlows to TransitionalEconomies tronic access: Full text: ProQuest Direct Stahl, T. New Operators:Deregulation in an IntegratedEurope. MOST (Nether- database;http:/jolis. worldbankimflib. orgl Comes to China's DomesticTelecom- lands),vol. 9:89-122,1999. uhtbin2/UMlperiod.pl?28390. munications Industry.China TradeRe- port(Hong Kong) 37:12-13,July 1999. Croatia: Financial Times Survey. Fi- Veghelyi, M. Hungary: Special Tax In- nancial Times (United Kingdom) pp.23- vestigation Unit. European Taxation Wo, L. China Unveils Unified Contract 26, July 9, 1999. (Netherlands)39:279-81, August 1999. Law. IntemationalFinancial Law Review (United Kingdom) 18:17-22,June 1999. Goodnow, J. D. InternationalBusiness Asia TransformationPatterns of Czech En- Xiaolu, W. Ups and Downs: Fluctua- terprises Since the Velvet Revolution Asia's Economies: On Their Feet tionsinEconomicGrowthDamagethe and the Velvet Divorce. Prague Eco- Again? Economist (United Kingdom) Economy. China Trade Report (Hong nomic Papers (Czech Republic) 8:178- 352:16-18, August 21-27, 1999. Elec- Kong)37:7,July 1999. 88, June 1999. tronic access: Full text: ProQuest Direct database;http.//]olis. worldbankimflib.org/ Yao,Y. Rural Industry and LaborMarket Hall, T. W. Poland and Russia One De- uhtbin2/UMlperiod.pl?28390. Integrationin EasternChina. Journalof cade after Shock Therapy. Joumal of Development Economics (Netherlands) Economic Issues (UnitedStates) 33:305- Bickers, C. Asia's Race To Go Digital. 59:463-96,August 1999. 14, June 1999. Far Eastern Economic Review (Hong Kong) 162:8-12 July 1, 1999. Electronic CIS Mannix, R. Local Hires the Key to Suc- access: Full text: ProQuest Direct data- cess in Hungary.Intemational Financial base; http://jolis.worldbankimflib.org/ Clemens, W. C., Jr. The Baltic Repub- Law Review (United Kingdom) 18:45-53, uhtbin2/UMlperiod.pI?23566. lics, Russia,and Energy:From Depen- June 1999. dencyto Interdependence?SAIS Review Blayney, S. Reforming China's Asset (United States) 19:190-208, Winter- Myant, M. Czech Enterprises: The Appraisal Regime. Intemational Finan- Spring 1999. Barriers to Restructuring. Prague cial Law Review (United Kingdom), Economic Papers (Czech Republic) 18(7):27-29,July 1999. Conway,P. Privatization and Price Con- 8:163-77, June 1999. vergence:Evidence from Four Markets Das Gupta, M. Gender Bias in China, in Kyiv. Journal of Comparative Eco- Ostaszewska,A. Albania: Reform of In- South Korea and India 1920-1990:Ef- nomics (United States) 27:231-57, June come Taxation. European Taxation fectsofWar,FamineandFertilityDecline.1999. (Netherlands)39:276-79, August 1999. Developmentand Change (Netherlands) 30:619-52,July 1999. Kandiyoti, D. Poverty in Transition:An Petrovic, P. The Yugoslav Hyperinfla- Ethnographic Critique of Household tion of 1924-1994: Causes,Dynamics, Foster, T. Vietnam Shows New Face Surveys in Post-Soviet Central Asia. and Money Supply Process.Journal of to Foreign Investors. International Fi- Developmentand Change(Netherlands) ComparativeEconomics (United States) nancial Law Review (United Kingdom) 30:499-524,July 1999. 27:335-53, June 1999. 18:55-56, June 1999. Electronic ac- cess: Full text: ProQuest Direct data- Kazakhstan: Financial Times Survey. Pleskovic, B., Challenges for the New base; http://jolis.worldbankimflib.org/ Financial Times (United Kingdom), EconomicGeography in the 21st Cen- uhtbin2/UMlperiod.pl?14903. Suppl.:I-IV, July 1, 1999. tury, InternationalRegional Science Re- view (United Kingdom) 22(2): 139-41, Houben, H. China Economic Reforms Komashenko,A. Personal Taxation in 1999. and Integrationinto the World Trading the Ukraine. Tax Planning International System.Journal of World Trade(Switzer- Review (United Kingdom) 26:15-16,Au- Testa, D. Confidence Is Returning. land)33(3):1-18,June 1999. gust 1999. Central European (United Kingdom) 9:44-45, July/August 1999. Electronic Sarno, L. Hot Money, Accounting La- Russia to Press for Broad Revamp access: Full text. ProQuest Direct data- bels, and the Permanenceof Capitals of Soviet-Era Debt. Wall Street Jour- base; http://jolis.worldbankimflib.org/ Flows to Developing Countries: An nal (United States), p. A17, July 28, uhtbin2/UMlperiod.pl?11291. Empirical Investigation.Journal of De- 1999.

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