http://www.worldbank.orgfhtml/prddr/trans/WEB/trans.htm I 8 6 q THE NEWSLETTER ABOUT REFORMING ECONOMIES Public Disclosure Authorized TRANSITION Volume 9, Number 5 October 1998 "We Did Not Neglect Institutional Development" Interview with World Bank's ECA Chief Economist Marcelo Selowsky Thereare tremendousdifferences among the transitioneconomies. Countnies in CentralEurope close to EU accessionare growing rapidly even faster than WestemEurope. On the other hand,the largesttransition country, Russia, is in economiccrisis. What can explainthis highly divergent performnance?What shouldhave been done differentlyin Russia? Transitioneditor, Richard Hirschler,posed these questions to MarceloSelowsky, chief economistof the Europeand CentralAsia Regionat the WorldBank. Mr. Selowskyhas done extensivewnting on macroeconomicand debt issues,and for more than a decade,focused his research Public Disclosure Authorized on povertyissues and investmentin humanresources. He did pioneeringwork on the economiccost of infantmalnutrition and drew attentionto the needto integratesocial programs for very young children into the overallinvestment in humancapital. He served as chief economistfor the Latin Americaand CaribbeanRegion duringthat region's debt crisis. Q. The1998 World Bank4MF Meetings about 25-30 percentof their exports. wereheld in excitingtimes: the Asian Whateverhappens to worldprices of oil, What's Inside crisisis far fromover, a worldreces- minerals,and cotton,it will also affect sionis looming;Russia's economy is theirgrowth prospects. As far as Russia disintegratingand the governmentis is concemed,inflation could accelerate RussianCrisis-Alternative still lookingfor a suitableeconomic sharplyas a resultof monetaryexpan- policy.In lightof all this,how do you sionto coverpension and wage arrears DavidsonInstitute Reports 13-16 see the prospectsfor the transition and lossesin the bankingsector. It is System 13 economiesin 1999? crucialfor Russia to strictlyprioritize Workshopon Consumerbehavior 14 Public Disclosure Authorized governmentexpenditures and quickly BankClosures in China17 A. In Central Europeand the Baltics reestablishcontrol of tax revenues.This muchwill dependon growthin Western will allowthe presentinflationary burst New GlobalMonetary Consensus? Europeand on the priceat whichinter- to be a temporaryone-aiming then to- 20 nationalcapital markets are willing to lend ward a graduallydeclining inflation rate. DHL Report:The Approaching to coverthese countries' current account MillenniumBug 22 deficits.Present growth rates will be af- Q. With hindsight,what do youthink ReadersForum 24-29 fectedif anabrupt reduction in thesedefi- of the Kiryenkogovernment's sum- RubleCollapse Revisited cits are necessary,as a resultof lower meragreement with the IMF,and the InflatedStock Exchanges exportsand difficultiesin findingexter- subsequentcommitment of the Bank VirtualEconomy-Pro and Contra nal finance.It is keyfor thesecountries to providean additional$1.5 billion Milestonesof Transition29 to intensifypolicy improvements to keep loan? With all signs indicating a attractingforeign direct investment (FDI) necessaryruble devaluation,why ConferenceDiary 31 and acceleratethe processtoward EU was the financialcommunity ready WorldBank/IMF Agenda 32 accession.Countries in the CIS border- to providebillions of dollarsto post- New Booksand Working Papers 33 Public Disclosure Authorized ing Russiawill feel the effects of the pone the unavoidable for a few Bibliographyof SelectedArticles 39 Russian crisis-Russia accounts for weeks? Macroeconomicsand Growth DevelopmentResearch Group TheWorld Bank A. Thesummer agreement tried to rees- ernments.Out of the group,only Japan tradeprimary products (oil, gas, min- tablishconfidence in the marketsby pro- contributedto the financing package. We era Is, timber) for food, consumer viding additionalfinancing as well as neededfour players-andwe had only goods,and other manufactured prod- obtainingfrom the governmenta com- two. ucts. Of course, one cannot blame mitmentto acceleratefiscal and struc- the internationalfinance institutions tural reforms.Some of these reforms I believethat an early, orderly, and trans- (IFis)for all the problems.Neverthe- were to be institutedimmediately and parentagreement with Russia'scredi- less, do they bearresponsibility for involvelegislative passage by the Duma, tors on replacingshort-term debt with these developments? What would particularlyon the tax front. long-term dollar obliga- the Bank do otherwiseif it had the As seen at that time,there tions, at interest rate chance to start over? wasa chance-andone can spreadsthat were prevail- debatethe magnitude of that ing beforethe EastAsian A. Let me beginwith some facts.The chance-that fulfillment of contagiontook hold, would transition economiesin Central Europe theprogram could have con- havetaken the pressure off and the Baltics that have undertaken vinced marketsto reduce .n Russia's public finances marketreforms have been growing fast the extremelyhigh-risk pre- and the ruble'sexchange for severalyears-faster thanWestern mium that investorswere i rate,and helpedto spread Europe.Those that have lagged in growth, demanding-interestrates these pressuresover the suchas Romaniaand Bulgaria, are pre- on the order of 100 per- medium term. Because ciselythose that havealso lagged in the cent-in returnfor refinanc- part of the short-termdebt reformprocess. Bulgaria is nowreform- ing the maturingtreasury obligations. washeld by domestic commercial banks, ing quickly,however. Countries in the Thesematuring obligations, coming due theG-7 govemments'financial contribu- Caucasusand the KyrgyzRepublic also overthe next 12 months, were quite large tion couldhave been used to shieldde- are growingfast. So today Russiaand relativeto GDP-around 10 percent- positorsfrom a deteriorationof thebanks' Ukraineare morethe exceptionthan the and relativeto the country'sforeign ex- balancesheets. The breathingspace rule,and the questionis whygrowth has changereserves. Hence,there was a couldthen have beenused to consoli- not resumedin these countries. clear risk that the financingpackage datefiscal and tax reformsand help the wouldnot be largeenough to bolsterthe countryto move graduallytoward an Reformin Russiaand Ukraine has been market'sconfidence. exchangerate realignment.In summary, interruptedabruptly several times during we neededan earlyand orderly process the past six yearsin an atmosphereof Unfortunatelythat risk did materialize. of wideburden sharing. verysharp confrontation between the ex- Althoughthe Duma approved several tax ecutive and the legislativebranches. measures,it failedto approvethe overall As far as the WorldBank is concemed, Manypolicy reforms have beenimple- tax package, which then had to be as part of the summerpackage, only mented throughpresidential decrees passedthrough decrees. That reduced $300million of the $1.5 billioncommit- ratherthan throughlegislation, thereby the expectationsof sustainedimprove- ted underthe thirdstructural adjustment reducingthe expectations of sustainability mentsin revenues. In addition,during loan(SAL ll) wasdisbursed immediately. of suchreforms. June, the Asia contagionreached its Futuredisbursements are contingenton peakas a resultof growingpolitical and furtherprogress on the structuralfront. Russia'sinitial conditions were also very financialturbulence in Indonesia. Both differentfrom those in CentralEurope. factorsturned market sentiments further Q. Many experts are blamingthe Labormobility and restructuring became againstRussia in spite of the summer international finance institutions muchmore difficult, due to thevery large agreement. becauseseveral transitionecono- share of military output and negative mies,primarily Russia, after six to value-addedindustries, and the domi- In myview, the summer agreement with eight years of experiments with nanceof largecompany towns, the sole the Kiryenkogovernment should have market-orientedeconomic policies, employers for a whole community, beena "generalequilibrium agreement," are experiencingrampant poverty, artifciallylocated in remoteregions, origi- incorporatingnot onlythe Russiangov- lawlessness,and corruption;their nally,for strategicreasons. This is com- ernmentand the internationalfinance bankingsectors are weak, their fis- poundedby the absenceof an inherited instituttionsbut also creditorsholding cal imbalancechronic, their foreign legal frameworkthat is supportiveof short-termpublic debt and the G-7 gov- trade structureunhealthy; and they marketdevelopment and property rights. * TRANSITION,October 1998 © 1998 The World Bank All these factors-erratic progressin Thisstate of limbois preciselywhat mo- front. But it is also an areawhere the reform and difficultinitial conditions- tivates asset stripping-in the interim initiative for change basically must have made it more difficult for these there is little interestin protectingthe come from withinthe country-thereis economiesto rapidly respondto im- capitalstock of the firm. Thisis exactly onlyso muchthat canbe achievedfrom proved incentives.This can be docu- whathappened in Bulgariaprior to 1996. the outside.Civil society first mustrec- mentedclearly by the low level of foreign ognizethe needfor legal and institu- directinvestment (FDI) and slow growth Also we have to acceptthat the Rus- tional reform.The Bankhas supported of smallfirms in Russiarelative to other sian privatizationhad its own momen- reformin theseareas but progresshas transitioneconomies. tum at that time.