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Socialist Economic Reform Unit bull Country Economics Department bull The World Bank

Descending the Stem of the J-Curve - Interviews from Bangkok

The painful but inevitable transshyformation process of the Censhytral and East European counshy

t ries was one ofthe major topics at the 1991 World Bank IIMF AnnualMeetshyings in Bangkok in October Early enthusiasm for reform has been reshyplaced by sober calculation about how far the CEE countries have progressed toward their goals of stabilization liberalization andprivatization how long the process might last how to cope with increasing social tensions and who should bear the high price tag for the changes High-ranking govshyernment officials from Hungary CzechoslovakuJ Bulgaria China and Tanzania spoke to Transition editor Richard Hirschler about the successes and failures of their economies (A second series ofinterviews will appear in the next issue ofTransition)

Suranyi Gyorgy president of the National Bank of Hungary

Q Do you agree with the controversial proposition thfu Central and Eastern Europe has much to learn from the economic policies of the East Asian tigers And how would you respond to those who wunt the Hungarian Censhyt ral Bank to gille up its strict monetary policy

AThe EastAsian model could hardly function in our region and without too much generalization I would like to point to four major differences First in East Asia collective accomplishshy

ment and group solidarity as well as workers respect for their superiors are deeply imbedded cultural eleshyments Religious traditions are difshyferent also and individualism plays a lesser role than in CEE

Second in East Asia the private secshytor has always been dominant As a result government policies even if wide ranging and pronounced have

Whats inside

Opinion polls in Poland Cautious support for market economy Support for radical economic changes has dwindled while the movement for gradual reform has gained ground The publicincreasingly favors private ownshyership and foreign investment espeshycially from the US (page 5)

Letters to the Editor Two comments on a recent article by IJSingh on socialist economic reform theory (page 6)

Quotation of the Month The Soviet business weekly Commerscnt outlines three scenarios for future inter-republic price relations no change a shift to world market prices or inter-republic price agreeshyments along the model of the defunct COMECON In any event among the republics Ukraine and Byelorus win fare well and the Central Asian Reshypublic will come out in the worst posishytion (page 9)

a more balanced outcome than in Censhytral and Eastern Europe where we were blessed with an overwhelming public sector Third institutions for multiparty democracy are in an inshyfant phase in most East Asian counshytries whereas inCentral Europe with thecollapse of communism the newly institutionalized checks and balances are challengingthe governments and limitingtheireconomic maneuvering

Reampearch Update Reallocation of labor at the lowest possible aocial eost presents a major challenge in Central and Eastern Eushyrope A new research project in the World Bank CECSE unit will invesshytigate the effects of unemployment on workers and their reemployment posshysibilities Research will focus on labor market dynamics in Slovenia (page 12)

World BankIIMF Agenda (page 8)

Milestones olTransition (page 11)

Conference Diary (page 13)

Book and Working Paper Brier (page 14)

Naw Book and Working Papers (page 16)

Bibliography (page 16)

October 1991Volume 2 Number 9

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Transition The World BankCECSE

Last but not least in Asian econoshymies governments are spared having to spend too much money on social safety nets Families traditionally take the major responsibility for proshyviding for the less productive memshy

bers and for the elderly Socialinshystitutions are constructed from bottom up This model cannot be adapted in Censhytral and Eastern Europe

The current social system in the postshysocialist countries which is a legacy from the formerregimes can no longer function A1though it had undisputed advantages - providing social secushyrity for a large section of the populashytion - it disproportion ally favored high-income groups over the truly needy functioned inefficiently and provided benefits that were not comshymensurate with the high costs Reshyform that is to withdraw the social benefits is politically difficult espeshycially where many people are severely distressed economically Yet a conshysiderable section of the population in the Central and Eastern European countries would be able to pay for better quality social services and reshysources could be freed for creation of genuine social safety nets A1though this observation applies to the region generally what is uniquely Hungarshyian is that the social system eats up an unusually large chunk of GDP Right now the budget is redistributshying60 percent of Hungarys GDP and a major part [more than 50 percent] of this goes for social expenditures

Bringinginflation under control would be the greatest social benefit for the lower income groups Price increases are more or less compensated by the middle class but not by the poor as historical experiences prove The paradox is that unless social systems undergo overall reform inflation stashybilizes at a high level as the ineffishycient systems need to be maintained by ever increasing taxes otherwise the budget deficit increases And both are fueling inflation

In answer to your second question I disagree with the experts who blame

october 1991

the National Banks monetary policy for the sluggish economy and call for drastic changes There is abundant capital in Hungary ifsomebody wan ts to invest although it is possible that commercial banks are not too eagler to take on long-term risks as the inflashytionary psychosis is still alive In my opinion money should playa neutral role in the business cycles othel1Nise money creates its own cycles thus seriously damaging the economy The Hungarian economy is still in a slugshygish phase with the GDP shrinking

We suffered an unprecedented shock with the sudden loss of the Soviet and EastEuropean markets No monetary policy in the world could have mitishygated the impact which equaled about 10-15 percent ofourGDP Our hSLrsh monetary policy played its role so that the forint [the Hungarian eurshyrency] held stable the gap between the official and black market rate disappeared [the rate is about 80 forints per dollar] and inflation never became an uncontrollable menace On the other hand without adequate monetary austerity such countries as Romania Bulgaria Yugoslavia and the USSR were unable to stem the acceleration of price increases nor the deep fall in production When we notice real change in the economy we shall reverse course for our monetary policy

We know that export-oriented growth is the only option for Hungary A very strong adjustment process already is under way The inflow offoreign c~lpishytal has accelerated About a billion donars came in the first eight months ofl991 compensatingfor the accrued interest Hungary has to pay annually on its foreign debt [about 20 billion dollars] The inflow offoreign capital could reach nearly 13 billion dollars by years end Our monetary reserves have filled up and now cover about three months imports Instead ofthe predicted 12 billion dollar deficit the current account might be balanced by the end of the year However the present inflation rate of about 33middot36 percent has to be brought down to 20 percent by the end of next year and to a single digit by 1993 To improve the supply response privatization will be further accelerated and the private sectors share in the economy probshy

2

ably will reach 20 percent by the end of the year two years ago its share wasnt even 10 percent What is of utmost importance I repeat is radishycal overall reform of the health edushycation and social security systems

VaclavKlaus MinisterofFinance and Deputy Prime Minister of Czechoslovakia

Q You are called Czechoslovakias messiah of the market economy preaching permanent reform day and night How do you assess your countrys economic situation nine

months after the large-scale libershyalization meashysures Some say you believe that the World Bank is not giving you hard enough adshyuicealongwith the hard currency

A The reform is a continuous process and must go on without hesitation or interruption otherwise opponents have time to prepare a defense against change If we want to be successful visible results are required certain peaksmust be conquered Swift overshynight deregulation ofth e market with liberalization of prices and foreign trade was the first peak in January 1991 I would argue that this has been a tremendous success In the meantime inflation which speeded up after price liberalization has been checked it is zero for the third conshysecutive month Our balance of payshyments situation is stable and the budget is and will remain in surplus although likely to drop somewhat by the end of the year

On the other hand output has fallen and unemployment from being zero a year ago has increased to 56 pershycent as of the end of September Alshythough I must add statistics are not very reliable any more due to the dramatic restructurin g of the economy and the dynamic development of the private sector

The second peak is privatization It can be done gradually as in some other East European countries or through a mass privatization process

Volume 2 Number 9

Transition The World BankCECSE

The latter is what we are undertakshying The first wave the distribution of voucher booklets started in October People are lining up at post offices where the vouchers are sold [A bookshylet of vouchers costs 1000 crowns worth 1000 points toward shares Enterprise shares win be auctioned late next year with share prices set according to demand and supply] At the same time on the supply side we are preparing the bundles offirms the several hundred companiesbeing privatized fully (lr partially via vouchshyers This privatization peak has sevshyeral consequences it will shift a subshystantial portion of state assets to prishyvate hands Just as important it will start a teaching process whereby milshylions ofpeople will start to care about investments and share values

But of course there are hundreds of everyday equally important changes which I do not c(lnsider peaks such as radical reform of the taxation system introduction of the value-added tax and legislation (such as was recently passed) on bankruptcy and on regushylating the stock exchange

The problems are standard and necshyessarily there are unfavorable side effects such as the J-curve [Reforms are accompanied by a steep fall of the economy before it gathers steamjust like the shape of the letter J] The task is to change without the unbearshyable destruction of economic activishyties Many irrational activities such as the artificial demands created by the old system must be eliminated The question is how to do it

Social tensions are remarkably low in Czechoslovakia We really have created a political consensus unlike other countries in the region It is our permanent job to appear in public and preach with strength and clarity about the costs and benefits of the transition process We were able to create a political party [Vaclav Klaus is leader of th e Liberal Democratic Party] that is flO organized constitushyency for economic reform

Concerning the World Banks role indeed we ara more interested in project-oriented financing joint deshyvelopment of our energy resources the financial sactor the telecommu-

Volume 2 Number 9 3

nication systems and protection of our environment We are less intershyested in consultations in technical assistance or in advice on running our economy But I repeat we more than welcome the Banks participashytion in our development projects

Ivan Kostov Minister of Finance for Bulgaria

Q Your delegation came to Bangkok in the midst of a crucial election in Bulgaria You as a leading econoshymist were one of the driving forces behind the restructuring and stabilishyzation program How do you evaluate Bulgarias reform process

A On balance it is clear that we succeeded in liberalizing prices elimishynating barriers to foreign trade setshytingup a functioningforeign exchange market [the rate was about 20 leva

per dollar in the middle of October] and starting to deshymonopolize inshydustry We reshyduced inflation to a manageshyable level However liqshyuidation of the command economys

structures and the consequent faltershying of many enterprises aggravated by new taxes and the collapse of Soshyviet trade as well as the shortage of hard currency even for basic imports have resulted in a production crash [GDP for 1991 is expected to fall 20 percent following a drop of 12 pershycent last year Foreign trade is only 16 percent of its 1989 level and sershyvicing of the 11 billion dollar foreign debt suspended last year is still awaiting rescheduling]

Not much has happened in the area of privatization either A privatization law has been drafted but its approval will be left to the new legislature The legal framework for private farming was created in early 1991 but it has had little effect Systemic changes must be accelerated and beginning in 1993 we can expect recovery of the economy Unemployment is a burnshying issue reaching 10 percent this year One solution could be to encourshyage women - 93 percent of whom are employed - to leave the workforce and return to their families even ifit means a temporary loss of purchasshying power for the families Also the new government has to negotiate with the IMF for a stand-by credit and we hope that World Bank financing will go ahead in areas such as infrastrucshyture highways and telecommunicashytions

From the Polish weekly Nie

October 1991

-------------------~- -------------shyThe World BankCECSE

--i Ruogu Deputy Director leopies Bank of China

1 What is the main thrust of reform in China Will central planningdomimiddot cate the scene or will market forces Cike over What is your comment on a pcent article in The Economist that

l in a lS able to achieve a spectacular ~ nnual growth race thanks to the speshyIial economic zones and despite the IIfYiciaily endorsed policies

A We started the Dresent course of economic reform 12 years ago Now we want to move forward in several fields Price liberalization will conshylinue even basic prices such as for coal and electricity wi II be freed Housmiddot ing reform will go ahead We are inshyLrodudng cost-related rent with a corresponding increase of wages We also have setup special savings banks Lv proVlde credits for housing Develshyopng the social safety system means introducing unemployment benefits creating training facilities and proshyviding security for the temporarily unemployed We are also progressing on enterprise reform making state companies stand on their own Lossshymakers will be liquidated or they will have to merge with more efficient en terprises (1n other countries] mass privatization of large- and mediumshysized enterprises is not the only solushyLion If enterprises are efficient it does not matter whether they are ~tDtemiddotowned or privately owned

f) country can be described as a pure market or a pure planned economy Governments have numerous tasks ltyen in the self-acclaimed market economies Planning is still very imshyportant In a country the size of China but I think market forces will prevail m the future P1anning however will

not fade away rather its traits will change with a focus on longershyterm policy isshysues Planning agencies will beshycome more effishycient and forshyward-looking and able to deshyvise alternative scenarios for the next 5-10 years

0ctober i991

thus enabling enterprises to adjust their strategies accordingly

In the southern part of China ecoshynomic development is very dynamic for several reasons Policies are more flexible and there has been longer experience with economic manageshyment compared to other parts of China Those provinces and cities are close to Macao Hong Kong and the southern Asian countries and their products are exported via HongKong the liaison to these areas Forlign investments are abundant Thesl~ reshygions are called the windows to the international economy through which experiences are gained skills learned and foreign trade developed with benefits spread all over the country These windows can be enlarged in the years to come until the ever-larger building will have only glass walls

The views expressed by Li Ruogu are hi8 own and were not expressed on behalfDf the Chinese delegation Dr the Chinese Gouemment

Kigoma A Malima Minister of State for Planning in Tanzania

Q What is the main lesson from the collapse ofcommunism for Tanzania once a bastion of African socialism Will the countrys economic policy change course endorsing private enmiddot terprise

A The fall of socialism in Eastern Europe reminded us that it is not enough to provide employment or inshycrease real income People also have to get involved in policyrnaking They need assurances that excessive power can be controlled Therefore Tanzashynia is addressing the issues of politishycal democratization as well as ecoshynomic liberalization

The Foreign Investment Code apshyproved last year is a very clear sign that the government is favoring prishyvate investments whether they are local or foreign Last July the InvE~stshyment Promotion Center was set up Price liberalization is making headshyway of the 350 commodities that were controlled in the 1980s only 10 now remain under price restrictions lhe share in the economy for the private sector is substantial 40middot50 percent of

4

agricultural production is in private hands for example Unprofitable pubshylic enterprises will be sold off and we expect more active participation by the private sector in developing the economy Mass privatization is adifshyficult question however In colonial Africa the economic stratification of the society was developed on a racial basis with whites and Indians occushypying the key economic and business positions After independence the Tanzanization of the economy meant that the state sector played a domishynant role Our own entrepreneurial class has to be developed and edushycated and this takes time

Changing economic course in the sen se of reducing cen tralized burea ushycratic control Yes but for creating an egalitarian and just society our course will not change We must be conscious of the dangers of excessive inequalities in society when a few

have so much and many so little The government aims at social harshymonization guarshyanteeing equal opportunities for education health services and genshyeral social welshyfare Leadership ethics and prinshyciples must be kept

The economic difficulties are enorshymous Our savings rate is low The country badly needs a well paid moshytivated highly efficient civil service The brain drain is getting worse the best professionals and civil sershyvants leave the country because they are not willing to serve for 120 dollars per month - in Botswana they can make 2000 dollars As a result inefshyficient bureaucratic red tape is serishyously hindering investment in Tanshyzania This is one of the reasons for the slow progress the GNP is growshying about 4 percent annually but population growth is 27 percent The greatest problem is how to accelerate the growth rate and the World Bank can support our goals But a well functioning government is a basic neshycessity

Volume 2 Number 9

Pro-Market Economyl Pro-Market Economyl Social Costs APIJreClalCle Costs Negligible

Unclassified

Anti-Market Economyl SOCial Costs Too High

Transition The World BankCECSE

Poles Support Market Economy with Caution Opinion poll reveals split society

N early twel years of shock therapy have taken their toll on the Polish publics willingshy

ness to endure economic hardship according to a series of nationwide public opinion polls commissioned by the US Information Agency In early 1990 more than 56 percent of Poles thought that Finance Minister Balcerowiczs radical economic reform program correctly addressed Polands economic woes But public support quickly waned as the adversity ofthe reform process became a daily realshyity By late 1990 only 30 percent favored radical economic reform and by mid-1991 support had dwindled to 17 percent In contrast a solid majority of Poles - 72 percent as of mid-1991 - said they preferred a program of gradual reform [This cershytainly helps to explain the huge abshystention rate - tiQ percent - and the inconclusive results of the recent parshyliamentary election]

However public favor of two key comshyponents of reform - private ownershyship and foreign investment - inshycreased in the six months up to midshy1991 As of late 1990 48 percent of Poles thought most businesses should be owned by the state while 39 pershycent thought they should be privately owned By mid-1991 support for privatization had risen to 45 percent Support for private ownership of bus ishyness was highest among the young (18-29) the university-educated and urbanites NevErtheless Poles still voice less support for privatization if it is thought to affect them personshyally For examplejust three in ten of those who worked for state-owned firms said they wanted their firms to be privatized five in ten said they did not and the rest of those surveyed offered no opinion Those who supshyported privatization were more optishymistic about their long-term economic future and were likely to favorradical reform In terms of support for

privatization of specific industries farms and restaurants were cited the most while heavy industry schools health care and the railroads were least likely to be favored for privatization

In contrast to public opinion in late 1990 when 44 percent of Poles thought foreign investments would not be helpful and would cause Poshyland to become dependent on foreignshyers just 33 percent voiced this conshycem six months later Instead 57 percent of Poles primarily the young and the well-educated voiced supshyport for foreign businesses investing in Poland Asked which Western counshytries companies were most actively pursuing business opportunities in Poland46 percent said Germany and 20 percent cited the United States Yet when asked which countries were preferred as investors nearly twice as many cited the US (56 percent) as Germany (29 percent) France (26 percent) and Japan (23 percent) were also preferred investors

Given the burdens of economic transhysition in Poland it is hardly surpris-

Market orientations among the Polish public

Source USIA OffICe ofResearch CEE branch

ing that in 1991 economic questions topped the publics list of the most urgent issues facing the country Unshyemployment headed the list of conshycems for women the young workers those with a secondary education and those living in mid-sized cities The cost of living the need for more order in the economy the economic reform process and agricultural issues comshypleted the roster of urgent economic concems In contrast to their conshycerns about economicissues few Poles cited such political issues as political stability development offreedom and democracy or removing former comshymunistsfrom power as being of much urgency In late 1990 public attenshytion had been somewhat more evenly divided between political and ecoshynomic issues The shift in attitude not only suggests the depth of public conshycern about the economic changes ocshycurring in PoIan d but also illustrates the view that most Poles do not beshylieve there are looming threats to Polands new pluralistic system of government

In mid-1991 most Poles expressed a positive attitude toward a market

Volume 2 Number 9 5 October 1991

Transition The World BankCECSE

econ omy 85 percen t believed that an economy only functions if business people make a profit and that this benefits the whole society in the long run More specifically 67 percent thought that under a free market economy some people might have a lot more money than others but in the long run everybody is better off th an under socialism Likewise seven in ten of the Poles surveyed indicated that private property is necessary for economic progress and six in ten thought a democratic society was posshysible only under a market economy Overall the young and the well-edushycated were the most likely to agree with these statements

Even so many Poles showed concern about particular aspects of a market economy More than 59 percent said they believed that people are more exploited when they work for a primiddot vate business than when they work for a state-controlled one A similar percentage believed that a market economy is characterized by coldness in human relationships But only 35 percent thought private property was a major cause of social injustice in society while 75 percent said unemshyployment would be too high in a marshyket economy and a similar number thought that there were too few safeshyguards for weaker members of socishyety Overall the less educated and older Poles were the most likely to express concern about the effects ofa market economy

As these data show the Polish govshyernment clearly faces a problem shy

Polish Perspective on MClrket-Economy Three Categories

bull A Pro-Market Economy Social Costs Negligible group (25 percent of Poles) Tends to believe that thi benefits ofa market economy outweigh thi liabilities Overall this group expresses the most satisfaction with the new state of affairs in Poland is optimistic about economic developshyments and favors radical economic reform Group members tend to be university educated under 30 years of age interested in politics and living in large urban areas

bull All Anti-Market Economy Social Costs Too High group (15 percent) Expresses a negative view of the political and economic situation and of radical economic reform A disproportionately high percentage ofPoles in this group live in rural areas are skilled or unskilled workers are less educated and are not interested in politics

bull A Pro-Market Economy Social Cost Appreciable group (58 percent) Is uncertain whether the benefits ofa market economy outweigh the costs and its evaluation ofpolitical and economic measures falls between the opinions of the othir two groups For example about half expressed satisfaction with thi performance of the national government but most were pessimistic about thi current and future economic situation Only 10 percent voiced support for radical economic reform This group differs demographically very little from thi general population (see figure previous page)

the publics willingness to endure proshylonged economic hardship has diminshyished and a majority remain uncershytain about the benefits of the new economy During his 1991 presidenshytial election campaign President u~ch Walesa promised to accelerate the process of reform This was apparshyently interpreted by many Poles to mean less hardship and more prosshyperity But the bedrock of Walesas economic program remains con tinued austerity Unless more Poles begin to prosper or at least think they will

prosper soon public opinion is likely to turn against the government One group however appears to transcend the public fray over economic reform measures - foreign investors Many Poles welcome foreign investment and prefer American investors over othshyers

Mary McIntosh chiefof the CEE unit Martha Abele MacIver research analyst CEE OffICe ofResearch USIA

Letters to the Editor A Walk or a Rush shy

here is an opinion eloquently argued both inside and outside the Bank that the East EuroshyT

pean countries should learn from Chinas success with gradual economic reform to modify their more radical approaches toward creation of a marshyket economy The presumption is that slow piecemeal reforms and secondshybest policies such as multiple exshychange rates industrial policy trade

October 1991

Comments on IJ Singhs recent article

barriers and continued use of subsishydies will minimize the social costs of transition while advancing refo rm far enough to tap the efficiency gains from a more liberal economic order Both the presumption and the argushyment fail to take account of fundashymental differences between China and Eastern Europe For example GNP per capita the international environshyment the role and performance of

6

agriculture the overall performance of the state sector market size and the long-term costs ofinterventionist policies are vastly different between China on the one hand and Eastern Europe and the Soviet Union on the other All this points up that a Chimiddot nese-style go-slow reform of the sysshytem and policy in Eastern Europe would be a recipe for prolonged stagshynation ifnot economic disaster

Volume 2 Number 9

Transition The World BonkCECSE

First China is at an early stage of development enjoying high growth rates because inter alia its starting base was low and growth is still largely extensive (Le originating mostly from the expansion of factors of production rather than from a pure increase in factor productivity) Sevshyeral decades ago when Eastern Euroshypean economies were similar to the current Chinese economy in terms of economic structure and level of de velshyopment they too achieved high growth rates despite highly centralshyized and autocratic systems Howshyever we know today that a lot of that growth (statistical problems aside) occurred in military and heavy indusshytry thus hardly contributing to the main goal of development a sustainshyable increase in the standard of livshying Nowadays Eastern Europe has mature but grossly Inefficient econoshymies that can be revitalized only through relatively fast restructuring and liberalization ofdomestic and forshyeign activities Slow reform will block change while er1suring a stagnantstashytus QUO

Second Eastern European economies are small and necessarily open econoshymies that havl~ much to gain right now from the exchange of knowledge technology investment and ideas with the EuropElan Community While China can affOld some isolation from the world markets mainly due to its immense size I~asternEurope clearly cannot In addition Eastern Europe is the textbook example of small open economies forced to adjust to permashynent sho(ks It is unlikely that China will face external shocks of similar magnitude in the near future conseshyquently there is much less urgency for a radical change Highly intervenshytionist policies which China is pursushying at this stage would almost cershytainly isolate Eastern Europe from the benefits 0 integration into the European Community

Third contrary to some perceptions the dramatic dEcline in output in Eastshyern Europe OVEr the past two years is systemic and as much the result of long-term problems as of short-term exogenous shc1cks such as the colshylapse of the CMEA and the use of restrictive stabilization programs Just as no stabilization of a

Volume 2 Number 9

hyperinflationary economy is achieved without a fast break on inshyflation sources no structural reform in Eastern Europe can succeed withshyout Quickly arresting the systemic causes of extreme structural imbalshyances and inefficiencies the wrong incentives for workers and managshyers overextension of state ownership and interference in the economy sysshytemic pervasive andarbitrary subsishydization and lack of accountability reward and effort

Fourth in Eastern Europe the perforshymance of state en terprises and banks the cornerstones of an economy is appalling compared to the situation for these institutions in China Eastshyern Europes state enterprises and banks have been undergoing reform and introducing various market crishyteria for more than a decade (for sevshyeral decades in Yugoslavia) but they have failed to bring about substan tial results This is because the governshyments failed to alter fundamentally the structure of ownership and the corresponding microeconomic incenshytives In Yugoslavia frequentinstitushytionalreform and continuous institushytional experimentation were followed by extreme financial indiscipline and the entropy of the system In fact the country grew more rapidly before reshyform Slow reform in Hungary and Poland over the past decade created instability and was accompanied by expansion of the black market economy In Bulgaria for a full year after the overthrow of the Zivkov govshyernment failure to start systemic reshyform contributed to the severe downshyturn of the economy Clearly pieceshymeal reform never managed to reshyverse the continuous decline of the East European economies a decline that became more drastic and obvishyous only in the past two years

Fifth as long as Chinas piecemeal reforms work its government will not want to embark on more radicalreshyform that it cannot easily controL In China peer pressure the Commushynist party influence and family and community ties apparently work as important complements to 01 substishytutes for the standard market incenshytives In Eastern Europe these facshytors effectively dissolved in the tushymult of the disappearance of the poshy

7

litical monopoly while market incenshytives are still to develop with the emerging private sector Given the incentive and institutional gaps the need for privatization in Eastern Eushyrope is mOre urgent than it would be in China for example Although the entry into the market of new private firms is already impressive it cannot alter the character of these economies in the immediate future and thus privatization is the pragmatic imperashytive of the day And the longer it is delayed the clearer it will become that the all-encompassing state secshytor alone cannot pull the economies out of their depression

Finally the international economic environment and the strong integrashytion forces at work in Western Europe clearly favor countries that are firmly committed to radical reform and free market policies Why should Eastern Europe not take advantage of this historic opportunity to get the best of the West and in record time The readiness of the West to provide adshyvice technical expertise and knowshyhow is more critical for Eastern Eushyrope than is a deluge of money at this time short of humanitarian aid and the economieslifeblood of short-term trade credits For their own benefit East European countries need to implement systemic reform particushylarly privatization as quickly as posshysible Waiting will delay the benefits of reform too far into the future while the costs will grow and possibly strangle the current changes

Zeljko Bogetic EM5CO The World Bcmk

Bela Csikos-Nagy

Whatever actually happens in Censhytral and Eastern Europe (CEE) and China is there really only a two-track approach to economic reform Inderji t Singhs excellent article in Transishytion touches on the concerns about countries with a socialist economic pattern

N everthelesslet me look at this probshylem from a different point of view Ido not believe that CEE on the one side

October 1991

Transition The World BonkCECSE

and China on the other can be examshyined at the same level In CEE a World BankjlMF Agendasystem transfonnation is going on whereas in China only the refonn of socialist economic planning is on the agenda In the first case a transforshymation Can be observed - from a socialist economy to a social market system and what happens is actually a re-capitalization process In conshytrast China wants to transfonn its socialist commodity-producing economy into a socialist market sysshytem What actually is happening in China (including the restoration of quasi-private property rights) is simishylar to the Hungarian economic refonn of the early 1980s

The two-track approach certainly exshyists although only in the context of Central and Eastern Europe Investishygating the matter from this aspect the issues debated in the article must be expanded I suggest addressing the following bull privatization vs reprivatization bull popular privatization vs the comshymercial variant bull liberalization and deregulation a hannonized vs a controversial solushytion bull social cost narrow vs widespread interpretation and bull maintaining international solvency vs suspending debt servicing etc

Last but not least as I see it the author was influenced by the overshywhelming view so typical of the peshyriod 1989-90 the time when shock therapy was considered to be an adshyequate remedy for crisis management in post-communist societies This comes to the fore strikingly in the paragraph headed Pricerefonn radishycal vs piecemeal I do not think the actual situation at the end of 1991 is what was expected by policymakers propounding this line in 198990

Bela Csik6smiddotNagy is a prominent economist and president of tlu Hungarian Eronomic Asmiddot sociaticn

Moscow Joke

QueBlion What is the new relationshyship among the pound the dollar and

i the ruble

Anwer A pound of rubles =1 dollar

October 1991

First aid from the Sisters

With the USSR now a special associshyate member of the IMF the Fund can begin immediate and wide-ranging technical assistance IMF experts are already in Moscow providing advice on macroeconomic policies exchange and payments systems tax and blmkshying reform and statistics and Soviet officials will be invited to IMF trainshyingcourses in Washington The stipushylations for the fonner Soviet Unions special association can beextended to individual Soviet republics as well The World Bank signed a technical assistance agreement the USSR and the Republics to be financed from a $30 million trust fund The agreeshyment focuses on assisting developshyment of a social safety net reforming the energy agriculture and housing sectors and other key industries deshyvelopingthe private sector and trainshying officials The Bank will also open an office in Moscow to facilitate the implementation of the agreement

IFC in CEE

According to the International Fishynance Corporations recent annual report the greatest expansion of its investment activity in the 1990s will occur in Central and Eastern Europe Out of an expected $4 billion a year in finanCing the IFC expects to approve up to $350 million annually for the CEE region - a 190 percent increase overthe amount approved in FY1991 Algeria Czechoslovakia Mongolia Namibia Romania and Bulgaria have joined the IFC in the past year raisshying the number of member countries to 142

Financial boost to Nicaragua

The World Bank approved a fast-disshybursing $110 million economic reshycoverycredit to Nicaragua from IDA the Banks concessionary-lending afshyfiliate The credit is providing supshyport to cut public sector employment revitalize the civil service reform the financial sector (provide a new regushylatory body and license four private

8

banks) and privatize vast sectors of the economy (return 350 state-owned businesses to the private sector) The IDA credit also supports the introshyduction of trade tax and regulatory reforms to promote private-sector proshyduction The Inter-American Develshyopment Bank is expected to co-finance the IDA credit with $130 million In addition the IMF recently approved a $557 million standby loan At the same time IDA is mobilizing addishytional concessional aid through its chairmanship of Nicaraguas consulshytative group of aid donors

Romanias health care

Romania will begin overhauling its health-care system control the spread of AIDS and improve family-planshyning services through a project supshyported by a $150 million World Bank loan (see TRANSITION September 1991) The project aims to reverse the worsening health conditions and imshyprove the health-care system It inshycludes improvements to rural healthshycare centers a health-education camshypaign strengthened family-planning programs training for health-care workers and provision of medical supplies for hospitals and other health facilities The loan will finance imshyports of medical supplies including disposable syringes and autoclaves The project will make birth control devices affordable and widely availshyable

Support to Laos

An IDA credit of$40 million will proshymote the Laotian Governments efshyforts to institute a market economy The credit wil1 support public entershyprise reform and privatization efforts to boost government revenues and measures to improve the management of public resources The governments privatization program began in 1991 The Bank will assist with auctioning offsmall public enterprises over the next three years Larger public en tershyprises with 30 or more employees will be sold at the rate of20 to 30 a year

(continued on page 14)

Volume 2 Number 9

0 ---z

Georgll

(1) Clntrlll Mia

Transition The World BankCECSE

Quotation of the Month Ukraine and Byelorus will clearly be the front runshyners in a new economic alliance Commersant on future inter-republic ties

The real economic independence of sovereign republics will in many ways depend on their

place in inter-republic exchanges These contacts will determine regardshyless of whether an economic agreeshyment is conclud~dor not the business relations of enterprises in the new states their balances of payments and ifthe ruble zone comes apart the exchange rates of their national curshyrencies

The combination of two factors - the export possibilities of the breakaway territories and the formal principles of an economic agreement - will deshycide the evolution of economic condishytions in every lregion Computations demonstrate that under any scenario of forging an economic alliance Ukraine and Byelorus will clearly be the front runners while the Central Asian nations will not be able to achieve economic independence

served in the transitional period and commodity exchanges between them may be based on current prices This possibility is linked to the central authorities position through the Yavlinsky program The inertia of inter-republican contacts is also due to the fact that more than a quarter of republican GNP is involved in intershyregional exchanges

Should this forecast come true Russhysia Ukraine Byelorus and Azershybaijan will remain donors (if one also takes into account republican contrishybutions to exports to third countries) Byelorus and Ukraine will then shoulshyder the heaviest donor burden All other regions will have to be subsishydized because of the lopsided distrishybution of centrally-imported resources and the balance of payments deficits in inter-republican trade However Latvia and Lithuania will almost be able to balance their accounts in dealshy

ing with other regions This will also be true of Georgia Armenia and Moldavia if their political situations stabilize and if the raw materials blockade is lifted

Scenario B Changeover to world prices

Most republics see a way out by conshyverting to world prices on exports to otherregionsand by introducing their own currencies as a means of protectshying their economics Should the nashytional balance of payments be divided completely among republics and they adopt separate currencies two opshytions are possible bull Republics will trade with third counshytries independently on the basis of world prices Payments among reshypublics will also be in hard currency but based on existing ruble prices bull Republics will rely on world prices for commerce among themselves

The most economically independent regions includl~ the Russian repubshylic where products supplied by other republics account for only 8 percent of gross consumption Ukraine (12 pershycent) and Kazakhstan and Azerbaijan (some 16 percent each) Only three of these republics report a surplus in inter-republican trade in current doshymestic prices -- Azerbaijan (+23 pershycent) Russia (+3 percent) and Ukraine (+06 percent) Elsewhere supplies from other republics are reshysponsible for 20 to 25 percent of overshyall consumption and exercise much greater influence on local economies

Scenario A With current prices

Although trade agreements among republics will probably be drastically changed in thl~ near future existing economic relations between entershypri ses in various regions may be pre-

Volume 2 Number 9

Possible dynamics of republican currency rates otter transition to hard currency and world prices In inleNepublican settlements

Ukrllnlln

marchlll BIIlIca krona

9 October 1991

-Transition The World BankCECSE

The two options may actually be phases of the same process Yet neishyther of them provides for preserving an integral hard currency-ruble zone It is possible though that in the first case the ruble will retain the status of a yard-stick in inter-repubshylican exchanges

I n the first case republics less depenshydent on imports from third countries and with a larger export potential may be in a more advantageous posishytion Computations show that Russia will suffer the heaviest balance of payments deficit with imports exshyceeding exports by 137 percent of the entire trade turnover including inshyter-regional exchanges This is beshycause products from third countries account for more than halfof all Russhysian imports For comparisons sake the share of import supplies in Ukraine and Byelorus trailing the Russian republic in this respect is twice as small In addition the deficit will to a large extent be due to the cheapness of raw materials exported to other republics

The Central Asian region will end up in an even worse position with the combined balance of payments deficit there equaling -178 percent Ukraine may also suffer a balance of paymen ts deficit of -63 percent due to the high proportion of supplies from other reshypublics in its overall imports Byelorus in contrast will enjoy a surplus of 5 percent as it is overshywhelmingly in the black in inter-reshypublican exchanges Transcaucasian republics will have a surplus of 15 percent for the same reason

The switch to world prices will change things dramatically Russia will be the only republic with a trade surplus (128 percent of the entire turnover) Ukraine and Kazakhstan will be able to slash their deficits but other reshygions will suffer catastrophically Transcaucasian republics will develop balance of paymen ts deficits at a level of -118 percent with Armenia and Georgia the hardest hit The Central sian regions deficit will burgeon to -215 percent The aggregate Baltic deficit will nearly triple to -213 pershycent and the Moldavian deficit will likely swell to -356 percent

No republic will be able to avoid the disastrous effects of such a downturn The changeover will provoke a severe structural crisis in republics around Russia as hundreds of enterprises running on Russian raw material s go broke An unprecedented recession in unemployment may follow with posshysibly up to 40 percent of the workforce in the Baltics losing their jobs

Russia can be expected to achieve a surplus in trade with Georgia quickly within a month-and-a-half after the switch the Baltics in two months the Central Asian region in two-and-ashyhalfmonths and Kazakhstan in threeshyand-a-halfmonths All indications are thatstructural maneuvering will Sl)on give a boost to the Byelorussian and Ukrainian currencies After a brief transitional period their exchange rates may even appreciate against the ruble because the two republics will enjoy a trade surplus with Russia in agricultural products and food

Efficiency Soviet Style ~~

~~ W_~~s~ ~~

~ ~ bullbull From the Souiet weekly Commersant

october 1991 10

Scenario C Transferrable ruble resuscitated

In the volatile situation of price deforshymities and uncertainty about the dishyvision of foreign debt the republics may preserve the Bank for Foreign Economic Activities (Vneshekoshynombank) as the single agency anshyswerable to third countries for the former USSRs state liabilities and to act as the chief manager of governshymentcredits The republics migh t use Vneshekonombank for transferring all account-settling in exportimport activities to republican foreign trade banks Raising prices on fuel power cotton ferrous and non-ferrous metshyals and possibly grain will be a comshypromise whereby raw material-exshyporting regions will not consider their interests infringed upon and raw material importers will not find themshyselves in a critical state Taking their cue from the defunct COMECON reshypublics can sign state contracts among themselves to supply products at prices that will remain stable for stipumiddot lated periods

In this case inter-republican exshychanges under state contracts and direct agreements between entershyprises in different regions can be served by an imaginary currency (a new transferrable ruble) with a stable exchange rate in relation to hard curshyrency The rate most likely will be regulated by an inter-republican agency patterned on COMECONs International Bank for Economic Coshyoperation - effectively a committee consisting of national bank represenshytatives engaged in facilitating intershyrepublican payments Republics may still introduce their own currencies Fluctuations will be determined mostly by the availability of goods in the markets the currency-creation policies of republican banks and the progress of economic reform in the regions Should this scenario materishyalize regions enjoying a surplus in foreign trade will naturally take the dominant positions in the new Intershynational Bank for Economic Cooperashytion

From Will it really work in the Soviet busimiddot ness weekly Commersant The authors Nikita Kirichenko Lyubou Strizhkova and Vera Shirobakoua comprise a research group

Volume 2 Number 9

Transition The Wor1d BankCECSE

Milestones of Transition

In late October Boris Yeltsin anshynounced a program of drastic ecoshynomic reforms for the Russian republic The plan would free prices and remove subsidies by the end of the year privatize large sections of state-owned industry and agriculture and create a more viable currency (Oil products and some consumer staples such as bread are likely to be excluded from the price liberalization) The price move will be preceded by a financial stabilization program deshysigned to mop up some of the bilshylions of eXCESS rubles in circulashytion and cut the former USSRs deficit slash grants to inefficient enterprises cut defense spending stop fundin~~ for about 70 Soviet ministries as of November 1 and end all economic assistance to forshyeign countries Other measures include dealing with newly indeshypendent Soviet republics in hard currency at world prices ending subsidizationjoining oth er repubshylics in a new economic community and providing safety nets for lowshyincome families Yeltsin proposed a new inter-state bank to be creshyated by Russia and the other reshypublics if the latter refrain from issuing their own currencies and agree to a system under which each republics vote would be proshyportionate to its capital If not Russia would form its own state bank and introduce its oVlm curshyrency said Yeltsin addingthathe was ready to head a new governshyment of national unity Inflation has reached a critical level and 55 percent offcimilies were living beshylow the poverty line he stated

The Europnan Bank for Reconshystruction an d Development is conshysidering establishing a new bank to finance trade from Eastern Eushyrope to the Soviet Union EBRD vice-president Ronald Freeman reminded a Paris conference that several East European countries have approached the EBRD for help in expcrtingto the USSR An

EBRD official in London said such a bank could be set up with the help of the World Bank the IMF the OECD and the EC with the EBRD charged with coordinating the new banks acshytivities EBRD President Jacques Attali raised the idea of creating the bank during the World BankllMF Annual Meeting in Bangkok in Octoshyber

Polands president Lech Walesa has hinted that he might appoint former Finance Minister Leszek Balcerowicz as head of the central bank Walesa wants to reorient economic reforms to soften their impact on the population give each Pole stock in privatized state industries intensify job retraining and stimulate local officials to begin auctioning vacant state property in their areas Poland could have as many as 35 million unemployed next year which would be the highest proshyportion of jobless in Europe saidJerzy Eysymont chief of the Polish Planshyning Office If current trends in the Polish economy continue unemployshyment could reach 16 to 18 percent of the workforce

Last year the Soviet Unions budget deficit reached 300 billion rubles or 25 percent of GNP and according to Soviet estimates it will be over 450 billion next year according to the latest figures of the Soviet central statistics office Goskomstat The Soshyviet money supply shot up sharply between June andAugust when up to 20 billion new rubles went into circushylation The state issued an additional 13 billion rubles during September In addition Soviet oil exports are expected to fall to 14 million barrels a day in the first quarter of 1992 half the level of the corresponding period in 1991 Goskomstat has announced that national income the main indishycator of the USSRs economic perforshymance fell 13 percent in the first nine months of 1991 The grain harvest is expected to be down a quarter from lastyears harvest atjust 160 million tons Goskomstat official Igor Pogosov told reporters that a unified financial

and credit policy has effectively broken down and that the repubshylics are pursuing separate and uncoordinated policies

Romanias new prime minister Theodor Stolojan says his top prishyority is to redress the impoverished economy Recent riots cost Romashynias economy almost $3 billion in delayed foreign loans and lost inshyvestment according to Economy Minister Eugen Dijmarescu The cost ofliving has more than tripled in the past 11 months Official figshyures showed that prices soared 2194 percent between October 1990 and October 1991

Germanys five leading economic research institutes report that western Germanys economic growth will slow to 2 percent in 1992 from 35 percent this year but eastern Germanys recovery shywith growth seen at 12 percent in 1992 following a 10 percent conshytraction this year - will expand united Germanys economy by 25 percent in 1992 In their annual economic report the five institutes predicted that the expansion would be uneven however with strong growth in the construction retail and service sectors and continued weakness in heavy industry

Inter-Korean trade has surged in 1991 totaling 124 million dollars in the first eight months asagainst 25 million dollars for the whole of 1990 Currently North Korea is informally seeking participation from South Korea in a possible Speshycial Economic Zone on the border with China and the USSR

The Chinese economy grew 68 pershycent in the first nine months of 1991 compared with the same period last year this makes the rate for the whole year above 6 percent according to Zhang Zhongji spokesman for the State Statistical Bureau The national economy has regained normal growth but some problems and unstable facshy

(continued on page 15)

Volume 2 Number 9 11 October 1991

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

losses d shy_-~o( f r

r r

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~ 07 ~

---

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From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

n i - _____ bullbull __ n ~ ~ ~~ 0 ________ _Ju __________ __ ___ __

Transition The World BankCECSE

Last but not least in Asian econoshymies governments are spared having to spend too much money on social safety nets Families traditionally take the major responsibility for proshyviding for the less productive memshy

bers and for the elderly Socialinshystitutions are constructed from bottom up This model cannot be adapted in Censhytral and Eastern Europe

The current social system in the postshysocialist countries which is a legacy from the formerregimes can no longer function A1though it had undisputed advantages - providing social secushyrity for a large section of the populashytion - it disproportion ally favored high-income groups over the truly needy functioned inefficiently and provided benefits that were not comshymensurate with the high costs Reshyform that is to withdraw the social benefits is politically difficult espeshycially where many people are severely distressed economically Yet a conshysiderable section of the population in the Central and Eastern European countries would be able to pay for better quality social services and reshysources could be freed for creation of genuine social safety nets A1though this observation applies to the region generally what is uniquely Hungarshyian is that the social system eats up an unusually large chunk of GDP Right now the budget is redistributshying60 percent of Hungarys GDP and a major part [more than 50 percent] of this goes for social expenditures

Bringinginflation under control would be the greatest social benefit for the lower income groups Price increases are more or less compensated by the middle class but not by the poor as historical experiences prove The paradox is that unless social systems undergo overall reform inflation stashybilizes at a high level as the ineffishycient systems need to be maintained by ever increasing taxes otherwise the budget deficit increases And both are fueling inflation

In answer to your second question I disagree with the experts who blame

october 1991

the National Banks monetary policy for the sluggish economy and call for drastic changes There is abundant capital in Hungary ifsomebody wan ts to invest although it is possible that commercial banks are not too eagler to take on long-term risks as the inflashytionary psychosis is still alive In my opinion money should playa neutral role in the business cycles othel1Nise money creates its own cycles thus seriously damaging the economy The Hungarian economy is still in a slugshygish phase with the GDP shrinking

We suffered an unprecedented shock with the sudden loss of the Soviet and EastEuropean markets No monetary policy in the world could have mitishygated the impact which equaled about 10-15 percent ofourGDP Our hSLrsh monetary policy played its role so that the forint [the Hungarian eurshyrency] held stable the gap between the official and black market rate disappeared [the rate is about 80 forints per dollar] and inflation never became an uncontrollable menace On the other hand without adequate monetary austerity such countries as Romania Bulgaria Yugoslavia and the USSR were unable to stem the acceleration of price increases nor the deep fall in production When we notice real change in the economy we shall reverse course for our monetary policy

We know that export-oriented growth is the only option for Hungary A very strong adjustment process already is under way The inflow offoreign c~lpishytal has accelerated About a billion donars came in the first eight months ofl991 compensatingfor the accrued interest Hungary has to pay annually on its foreign debt [about 20 billion dollars] The inflow offoreign capital could reach nearly 13 billion dollars by years end Our monetary reserves have filled up and now cover about three months imports Instead ofthe predicted 12 billion dollar deficit the current account might be balanced by the end of the year However the present inflation rate of about 33middot36 percent has to be brought down to 20 percent by the end of next year and to a single digit by 1993 To improve the supply response privatization will be further accelerated and the private sectors share in the economy probshy

2

ably will reach 20 percent by the end of the year two years ago its share wasnt even 10 percent What is of utmost importance I repeat is radishycal overall reform of the health edushycation and social security systems

VaclavKlaus MinisterofFinance and Deputy Prime Minister of Czechoslovakia

Q You are called Czechoslovakias messiah of the market economy preaching permanent reform day and night How do you assess your countrys economic situation nine

months after the large-scale libershyalization meashysures Some say you believe that the World Bank is not giving you hard enough adshyuicealongwith the hard currency

A The reform is a continuous process and must go on without hesitation or interruption otherwise opponents have time to prepare a defense against change If we want to be successful visible results are required certain peaksmust be conquered Swift overshynight deregulation ofth e market with liberalization of prices and foreign trade was the first peak in January 1991 I would argue that this has been a tremendous success In the meantime inflation which speeded up after price liberalization has been checked it is zero for the third conshysecutive month Our balance of payshyments situation is stable and the budget is and will remain in surplus although likely to drop somewhat by the end of the year

On the other hand output has fallen and unemployment from being zero a year ago has increased to 56 pershycent as of the end of September Alshythough I must add statistics are not very reliable any more due to the dramatic restructurin g of the economy and the dynamic development of the private sector

The second peak is privatization It can be done gradually as in some other East European countries or through a mass privatization process

Volume 2 Number 9

Transition The World BankCECSE

The latter is what we are undertakshying The first wave the distribution of voucher booklets started in October People are lining up at post offices where the vouchers are sold [A bookshylet of vouchers costs 1000 crowns worth 1000 points toward shares Enterprise shares win be auctioned late next year with share prices set according to demand and supply] At the same time on the supply side we are preparing the bundles offirms the several hundred companiesbeing privatized fully (lr partially via vouchshyers This privatization peak has sevshyeral consequences it will shift a subshystantial portion of state assets to prishyvate hands Just as important it will start a teaching process whereby milshylions ofpeople will start to care about investments and share values

But of course there are hundreds of everyday equally important changes which I do not c(lnsider peaks such as radical reform of the taxation system introduction of the value-added tax and legislation (such as was recently passed) on bankruptcy and on regushylating the stock exchange

The problems are standard and necshyessarily there are unfavorable side effects such as the J-curve [Reforms are accompanied by a steep fall of the economy before it gathers steamjust like the shape of the letter J] The task is to change without the unbearshyable destruction of economic activishyties Many irrational activities such as the artificial demands created by the old system must be eliminated The question is how to do it

Social tensions are remarkably low in Czechoslovakia We really have created a political consensus unlike other countries in the region It is our permanent job to appear in public and preach with strength and clarity about the costs and benefits of the transition process We were able to create a political party [Vaclav Klaus is leader of th e Liberal Democratic Party] that is flO organized constitushyency for economic reform

Concerning the World Banks role indeed we ara more interested in project-oriented financing joint deshyvelopment of our energy resources the financial sactor the telecommu-

Volume 2 Number 9 3

nication systems and protection of our environment We are less intershyested in consultations in technical assistance or in advice on running our economy But I repeat we more than welcome the Banks participashytion in our development projects

Ivan Kostov Minister of Finance for Bulgaria

Q Your delegation came to Bangkok in the midst of a crucial election in Bulgaria You as a leading econoshymist were one of the driving forces behind the restructuring and stabilishyzation program How do you evaluate Bulgarias reform process

A On balance it is clear that we succeeded in liberalizing prices elimishynating barriers to foreign trade setshytingup a functioningforeign exchange market [the rate was about 20 leva

per dollar in the middle of October] and starting to deshymonopolize inshydustry We reshyduced inflation to a manageshyable level However liqshyuidation of the command economys

structures and the consequent faltershying of many enterprises aggravated by new taxes and the collapse of Soshyviet trade as well as the shortage of hard currency even for basic imports have resulted in a production crash [GDP for 1991 is expected to fall 20 percent following a drop of 12 pershycent last year Foreign trade is only 16 percent of its 1989 level and sershyvicing of the 11 billion dollar foreign debt suspended last year is still awaiting rescheduling]

Not much has happened in the area of privatization either A privatization law has been drafted but its approval will be left to the new legislature The legal framework for private farming was created in early 1991 but it has had little effect Systemic changes must be accelerated and beginning in 1993 we can expect recovery of the economy Unemployment is a burnshying issue reaching 10 percent this year One solution could be to encourshyage women - 93 percent of whom are employed - to leave the workforce and return to their families even ifit means a temporary loss of purchasshying power for the families Also the new government has to negotiate with the IMF for a stand-by credit and we hope that World Bank financing will go ahead in areas such as infrastrucshyture highways and telecommunicashytions

From the Polish weekly Nie

October 1991

-------------------~- -------------shyThe World BankCECSE

--i Ruogu Deputy Director leopies Bank of China

1 What is the main thrust of reform in China Will central planningdomimiddot cate the scene or will market forces Cike over What is your comment on a pcent article in The Economist that

l in a lS able to achieve a spectacular ~ nnual growth race thanks to the speshyIial economic zones and despite the IIfYiciaily endorsed policies

A We started the Dresent course of economic reform 12 years ago Now we want to move forward in several fields Price liberalization will conshylinue even basic prices such as for coal and electricity wi II be freed Housmiddot ing reform will go ahead We are inshyLrodudng cost-related rent with a corresponding increase of wages We also have setup special savings banks Lv proVlde credits for housing Develshyopng the social safety system means introducing unemployment benefits creating training facilities and proshyviding security for the temporarily unemployed We are also progressing on enterprise reform making state companies stand on their own Lossshymakers will be liquidated or they will have to merge with more efficient en terprises (1n other countries] mass privatization of large- and mediumshysized enterprises is not the only solushyLion If enterprises are efficient it does not matter whether they are ~tDtemiddotowned or privately owned

f) country can be described as a pure market or a pure planned economy Governments have numerous tasks ltyen in the self-acclaimed market economies Planning is still very imshyportant In a country the size of China but I think market forces will prevail m the future P1anning however will

not fade away rather its traits will change with a focus on longershyterm policy isshysues Planning agencies will beshycome more effishycient and forshyward-looking and able to deshyvise alternative scenarios for the next 5-10 years

0ctober i991

thus enabling enterprises to adjust their strategies accordingly

In the southern part of China ecoshynomic development is very dynamic for several reasons Policies are more flexible and there has been longer experience with economic manageshyment compared to other parts of China Those provinces and cities are close to Macao Hong Kong and the southern Asian countries and their products are exported via HongKong the liaison to these areas Forlign investments are abundant Thesl~ reshygions are called the windows to the international economy through which experiences are gained skills learned and foreign trade developed with benefits spread all over the country These windows can be enlarged in the years to come until the ever-larger building will have only glass walls

The views expressed by Li Ruogu are hi8 own and were not expressed on behalfDf the Chinese delegation Dr the Chinese Gouemment

Kigoma A Malima Minister of State for Planning in Tanzania

Q What is the main lesson from the collapse ofcommunism for Tanzania once a bastion of African socialism Will the countrys economic policy change course endorsing private enmiddot terprise

A The fall of socialism in Eastern Europe reminded us that it is not enough to provide employment or inshycrease real income People also have to get involved in policyrnaking They need assurances that excessive power can be controlled Therefore Tanzashynia is addressing the issues of politishycal democratization as well as ecoshynomic liberalization

The Foreign Investment Code apshyproved last year is a very clear sign that the government is favoring prishyvate investments whether they are local or foreign Last July the InvE~stshyment Promotion Center was set up Price liberalization is making headshyway of the 350 commodities that were controlled in the 1980s only 10 now remain under price restrictions lhe share in the economy for the private sector is substantial 40middot50 percent of

4

agricultural production is in private hands for example Unprofitable pubshylic enterprises will be sold off and we expect more active participation by the private sector in developing the economy Mass privatization is adifshyficult question however In colonial Africa the economic stratification of the society was developed on a racial basis with whites and Indians occushypying the key economic and business positions After independence the Tanzanization of the economy meant that the state sector played a domishynant role Our own entrepreneurial class has to be developed and edushycated and this takes time

Changing economic course in the sen se of reducing cen tralized burea ushycratic control Yes but for creating an egalitarian and just society our course will not change We must be conscious of the dangers of excessive inequalities in society when a few

have so much and many so little The government aims at social harshymonization guarshyanteeing equal opportunities for education health services and genshyeral social welshyfare Leadership ethics and prinshyciples must be kept

The economic difficulties are enorshymous Our savings rate is low The country badly needs a well paid moshytivated highly efficient civil service The brain drain is getting worse the best professionals and civil sershyvants leave the country because they are not willing to serve for 120 dollars per month - in Botswana they can make 2000 dollars As a result inefshyficient bureaucratic red tape is serishyously hindering investment in Tanshyzania This is one of the reasons for the slow progress the GNP is growshying about 4 percent annually but population growth is 27 percent The greatest problem is how to accelerate the growth rate and the World Bank can support our goals But a well functioning government is a basic neshycessity

Volume 2 Number 9

Pro-Market Economyl Pro-Market Economyl Social Costs APIJreClalCle Costs Negligible

Unclassified

Anti-Market Economyl SOCial Costs Too High

Transition The World BankCECSE

Poles Support Market Economy with Caution Opinion poll reveals split society

N early twel years of shock therapy have taken their toll on the Polish publics willingshy

ness to endure economic hardship according to a series of nationwide public opinion polls commissioned by the US Information Agency In early 1990 more than 56 percent of Poles thought that Finance Minister Balcerowiczs radical economic reform program correctly addressed Polands economic woes But public support quickly waned as the adversity ofthe reform process became a daily realshyity By late 1990 only 30 percent favored radical economic reform and by mid-1991 support had dwindled to 17 percent In contrast a solid majority of Poles - 72 percent as of mid-1991 - said they preferred a program of gradual reform [This cershytainly helps to explain the huge abshystention rate - tiQ percent - and the inconclusive results of the recent parshyliamentary election]

However public favor of two key comshyponents of reform - private ownershyship and foreign investment - inshycreased in the six months up to midshy1991 As of late 1990 48 percent of Poles thought most businesses should be owned by the state while 39 pershycent thought they should be privately owned By mid-1991 support for privatization had risen to 45 percent Support for private ownership of bus ishyness was highest among the young (18-29) the university-educated and urbanites NevErtheless Poles still voice less support for privatization if it is thought to affect them personshyally For examplejust three in ten of those who worked for state-owned firms said they wanted their firms to be privatized five in ten said they did not and the rest of those surveyed offered no opinion Those who supshyported privatization were more optishymistic about their long-term economic future and were likely to favorradical reform In terms of support for

privatization of specific industries farms and restaurants were cited the most while heavy industry schools health care and the railroads were least likely to be favored for privatization

In contrast to public opinion in late 1990 when 44 percent of Poles thought foreign investments would not be helpful and would cause Poshyland to become dependent on foreignshyers just 33 percent voiced this conshycem six months later Instead 57 percent of Poles primarily the young and the well-educated voiced supshyport for foreign businesses investing in Poland Asked which Western counshytries companies were most actively pursuing business opportunities in Poland46 percent said Germany and 20 percent cited the United States Yet when asked which countries were preferred as investors nearly twice as many cited the US (56 percent) as Germany (29 percent) France (26 percent) and Japan (23 percent) were also preferred investors

Given the burdens of economic transhysition in Poland it is hardly surpris-

Market orientations among the Polish public

Source USIA OffICe ofResearch CEE branch

ing that in 1991 economic questions topped the publics list of the most urgent issues facing the country Unshyemployment headed the list of conshycems for women the young workers those with a secondary education and those living in mid-sized cities The cost of living the need for more order in the economy the economic reform process and agricultural issues comshypleted the roster of urgent economic concems In contrast to their conshycerns about economicissues few Poles cited such political issues as political stability development offreedom and democracy or removing former comshymunistsfrom power as being of much urgency In late 1990 public attenshytion had been somewhat more evenly divided between political and ecoshynomic issues The shift in attitude not only suggests the depth of public conshycern about the economic changes ocshycurring in PoIan d but also illustrates the view that most Poles do not beshylieve there are looming threats to Polands new pluralistic system of government

In mid-1991 most Poles expressed a positive attitude toward a market

Volume 2 Number 9 5 October 1991

Transition The World BankCECSE

econ omy 85 percen t believed that an economy only functions if business people make a profit and that this benefits the whole society in the long run More specifically 67 percent thought that under a free market economy some people might have a lot more money than others but in the long run everybody is better off th an under socialism Likewise seven in ten of the Poles surveyed indicated that private property is necessary for economic progress and six in ten thought a democratic society was posshysible only under a market economy Overall the young and the well-edushycated were the most likely to agree with these statements

Even so many Poles showed concern about particular aspects of a market economy More than 59 percent said they believed that people are more exploited when they work for a primiddot vate business than when they work for a state-controlled one A similar percentage believed that a market economy is characterized by coldness in human relationships But only 35 percent thought private property was a major cause of social injustice in society while 75 percent said unemshyployment would be too high in a marshyket economy and a similar number thought that there were too few safeshyguards for weaker members of socishyety Overall the less educated and older Poles were the most likely to express concern about the effects ofa market economy

As these data show the Polish govshyernment clearly faces a problem shy

Polish Perspective on MClrket-Economy Three Categories

bull A Pro-Market Economy Social Costs Negligible group (25 percent of Poles) Tends to believe that thi benefits ofa market economy outweigh thi liabilities Overall this group expresses the most satisfaction with the new state of affairs in Poland is optimistic about economic developshyments and favors radical economic reform Group members tend to be university educated under 30 years of age interested in politics and living in large urban areas

bull All Anti-Market Economy Social Costs Too High group (15 percent) Expresses a negative view of the political and economic situation and of radical economic reform A disproportionately high percentage ofPoles in this group live in rural areas are skilled or unskilled workers are less educated and are not interested in politics

bull A Pro-Market Economy Social Cost Appreciable group (58 percent) Is uncertain whether the benefits ofa market economy outweigh the costs and its evaluation ofpolitical and economic measures falls between the opinions of the othir two groups For example about half expressed satisfaction with thi performance of the national government but most were pessimistic about thi current and future economic situation Only 10 percent voiced support for radical economic reform This group differs demographically very little from thi general population (see figure previous page)

the publics willingness to endure proshylonged economic hardship has diminshyished and a majority remain uncershytain about the benefits of the new economy During his 1991 presidenshytial election campaign President u~ch Walesa promised to accelerate the process of reform This was apparshyently interpreted by many Poles to mean less hardship and more prosshyperity But the bedrock of Walesas economic program remains con tinued austerity Unless more Poles begin to prosper or at least think they will

prosper soon public opinion is likely to turn against the government One group however appears to transcend the public fray over economic reform measures - foreign investors Many Poles welcome foreign investment and prefer American investors over othshyers

Mary McIntosh chiefof the CEE unit Martha Abele MacIver research analyst CEE OffICe ofResearch USIA

Letters to the Editor A Walk or a Rush shy

here is an opinion eloquently argued both inside and outside the Bank that the East EuroshyT

pean countries should learn from Chinas success with gradual economic reform to modify their more radical approaches toward creation of a marshyket economy The presumption is that slow piecemeal reforms and secondshybest policies such as multiple exshychange rates industrial policy trade

October 1991

Comments on IJ Singhs recent article

barriers and continued use of subsishydies will minimize the social costs of transition while advancing refo rm far enough to tap the efficiency gains from a more liberal economic order Both the presumption and the argushyment fail to take account of fundashymental differences between China and Eastern Europe For example GNP per capita the international environshyment the role and performance of

6

agriculture the overall performance of the state sector market size and the long-term costs ofinterventionist policies are vastly different between China on the one hand and Eastern Europe and the Soviet Union on the other All this points up that a Chimiddot nese-style go-slow reform of the sysshytem and policy in Eastern Europe would be a recipe for prolonged stagshynation ifnot economic disaster

Volume 2 Number 9

Transition The World BonkCECSE

First China is at an early stage of development enjoying high growth rates because inter alia its starting base was low and growth is still largely extensive (Le originating mostly from the expansion of factors of production rather than from a pure increase in factor productivity) Sevshyeral decades ago when Eastern Euroshypean economies were similar to the current Chinese economy in terms of economic structure and level of de velshyopment they too achieved high growth rates despite highly centralshyized and autocratic systems Howshyever we know today that a lot of that growth (statistical problems aside) occurred in military and heavy indusshytry thus hardly contributing to the main goal of development a sustainshyable increase in the standard of livshying Nowadays Eastern Europe has mature but grossly Inefficient econoshymies that can be revitalized only through relatively fast restructuring and liberalization ofdomestic and forshyeign activities Slow reform will block change while er1suring a stagnantstashytus QUO

Second Eastern European economies are small and necessarily open econoshymies that havl~ much to gain right now from the exchange of knowledge technology investment and ideas with the EuropElan Community While China can affOld some isolation from the world markets mainly due to its immense size I~asternEurope clearly cannot In addition Eastern Europe is the textbook example of small open economies forced to adjust to permashynent sho(ks It is unlikely that China will face external shocks of similar magnitude in the near future conseshyquently there is much less urgency for a radical change Highly intervenshytionist policies which China is pursushying at this stage would almost cershytainly isolate Eastern Europe from the benefits 0 integration into the European Community

Third contrary to some perceptions the dramatic dEcline in output in Eastshyern Europe OVEr the past two years is systemic and as much the result of long-term problems as of short-term exogenous shc1cks such as the colshylapse of the CMEA and the use of restrictive stabilization programs Just as no stabilization of a

Volume 2 Number 9

hyperinflationary economy is achieved without a fast break on inshyflation sources no structural reform in Eastern Europe can succeed withshyout Quickly arresting the systemic causes of extreme structural imbalshyances and inefficiencies the wrong incentives for workers and managshyers overextension of state ownership and interference in the economy sysshytemic pervasive andarbitrary subsishydization and lack of accountability reward and effort

Fourth in Eastern Europe the perforshymance of state en terprises and banks the cornerstones of an economy is appalling compared to the situation for these institutions in China Eastshyern Europes state enterprises and banks have been undergoing reform and introducing various market crishyteria for more than a decade (for sevshyeral decades in Yugoslavia) but they have failed to bring about substan tial results This is because the governshyments failed to alter fundamentally the structure of ownership and the corresponding microeconomic incenshytives In Yugoslavia frequentinstitushytionalreform and continuous institushytional experimentation were followed by extreme financial indiscipline and the entropy of the system In fact the country grew more rapidly before reshyform Slow reform in Hungary and Poland over the past decade created instability and was accompanied by expansion of the black market economy In Bulgaria for a full year after the overthrow of the Zivkov govshyernment failure to start systemic reshyform contributed to the severe downshyturn of the economy Clearly pieceshymeal reform never managed to reshyverse the continuous decline of the East European economies a decline that became more drastic and obvishyous only in the past two years

Fifth as long as Chinas piecemeal reforms work its government will not want to embark on more radicalreshyform that it cannot easily controL In China peer pressure the Commushynist party influence and family and community ties apparently work as important complements to 01 substishytutes for the standard market incenshytives In Eastern Europe these facshytors effectively dissolved in the tushymult of the disappearance of the poshy

7

litical monopoly while market incenshytives are still to develop with the emerging private sector Given the incentive and institutional gaps the need for privatization in Eastern Eushyrope is mOre urgent than it would be in China for example Although the entry into the market of new private firms is already impressive it cannot alter the character of these economies in the immediate future and thus privatization is the pragmatic imperashytive of the day And the longer it is delayed the clearer it will become that the all-encompassing state secshytor alone cannot pull the economies out of their depression

Finally the international economic environment and the strong integrashytion forces at work in Western Europe clearly favor countries that are firmly committed to radical reform and free market policies Why should Eastern Europe not take advantage of this historic opportunity to get the best of the West and in record time The readiness of the West to provide adshyvice technical expertise and knowshyhow is more critical for Eastern Eushyrope than is a deluge of money at this time short of humanitarian aid and the economieslifeblood of short-term trade credits For their own benefit East European countries need to implement systemic reform particushylarly privatization as quickly as posshysible Waiting will delay the benefits of reform too far into the future while the costs will grow and possibly strangle the current changes

Zeljko Bogetic EM5CO The World Bcmk

Bela Csikos-Nagy

Whatever actually happens in Censhytral and Eastern Europe (CEE) and China is there really only a two-track approach to economic reform Inderji t Singhs excellent article in Transishytion touches on the concerns about countries with a socialist economic pattern

N everthelesslet me look at this probshylem from a different point of view Ido not believe that CEE on the one side

October 1991

Transition The World BonkCECSE

and China on the other can be examshyined at the same level In CEE a World BankjlMF Agendasystem transfonnation is going on whereas in China only the refonn of socialist economic planning is on the agenda In the first case a transforshymation Can be observed - from a socialist economy to a social market system and what happens is actually a re-capitalization process In conshytrast China wants to transfonn its socialist commodity-producing economy into a socialist market sysshytem What actually is happening in China (including the restoration of quasi-private property rights) is simishylar to the Hungarian economic refonn of the early 1980s

The two-track approach certainly exshyists although only in the context of Central and Eastern Europe Investishygating the matter from this aspect the issues debated in the article must be expanded I suggest addressing the following bull privatization vs reprivatization bull popular privatization vs the comshymercial variant bull liberalization and deregulation a hannonized vs a controversial solushytion bull social cost narrow vs widespread interpretation and bull maintaining international solvency vs suspending debt servicing etc

Last but not least as I see it the author was influenced by the overshywhelming view so typical of the peshyriod 1989-90 the time when shock therapy was considered to be an adshyequate remedy for crisis management in post-communist societies This comes to the fore strikingly in the paragraph headed Pricerefonn radishycal vs piecemeal I do not think the actual situation at the end of 1991 is what was expected by policymakers propounding this line in 198990

Bela Csik6smiddotNagy is a prominent economist and president of tlu Hungarian Eronomic Asmiddot sociaticn

Moscow Joke

QueBlion What is the new relationshyship among the pound the dollar and

i the ruble

Anwer A pound of rubles =1 dollar

October 1991

First aid from the Sisters

With the USSR now a special associshyate member of the IMF the Fund can begin immediate and wide-ranging technical assistance IMF experts are already in Moscow providing advice on macroeconomic policies exchange and payments systems tax and blmkshying reform and statistics and Soviet officials will be invited to IMF trainshyingcourses in Washington The stipushylations for the fonner Soviet Unions special association can beextended to individual Soviet republics as well The World Bank signed a technical assistance agreement the USSR and the Republics to be financed from a $30 million trust fund The agreeshyment focuses on assisting developshyment of a social safety net reforming the energy agriculture and housing sectors and other key industries deshyvelopingthe private sector and trainshying officials The Bank will also open an office in Moscow to facilitate the implementation of the agreement

IFC in CEE

According to the International Fishynance Corporations recent annual report the greatest expansion of its investment activity in the 1990s will occur in Central and Eastern Europe Out of an expected $4 billion a year in finanCing the IFC expects to approve up to $350 million annually for the CEE region - a 190 percent increase overthe amount approved in FY1991 Algeria Czechoslovakia Mongolia Namibia Romania and Bulgaria have joined the IFC in the past year raisshying the number of member countries to 142

Financial boost to Nicaragua

The World Bank approved a fast-disshybursing $110 million economic reshycoverycredit to Nicaragua from IDA the Banks concessionary-lending afshyfiliate The credit is providing supshyport to cut public sector employment revitalize the civil service reform the financial sector (provide a new regushylatory body and license four private

8

banks) and privatize vast sectors of the economy (return 350 state-owned businesses to the private sector) The IDA credit also supports the introshyduction of trade tax and regulatory reforms to promote private-sector proshyduction The Inter-American Develshyopment Bank is expected to co-finance the IDA credit with $130 million In addition the IMF recently approved a $557 million standby loan At the same time IDA is mobilizing addishytional concessional aid through its chairmanship of Nicaraguas consulshytative group of aid donors

Romanias health care

Romania will begin overhauling its health-care system control the spread of AIDS and improve family-planshyning services through a project supshyported by a $150 million World Bank loan (see TRANSITION September 1991) The project aims to reverse the worsening health conditions and imshyprove the health-care system It inshycludes improvements to rural healthshycare centers a health-education camshypaign strengthened family-planning programs training for health-care workers and provision of medical supplies for hospitals and other health facilities The loan will finance imshyports of medical supplies including disposable syringes and autoclaves The project will make birth control devices affordable and widely availshyable

Support to Laos

An IDA credit of$40 million will proshymote the Laotian Governments efshyforts to institute a market economy The credit wil1 support public entershyprise reform and privatization efforts to boost government revenues and measures to improve the management of public resources The governments privatization program began in 1991 The Bank will assist with auctioning offsmall public enterprises over the next three years Larger public en tershyprises with 30 or more employees will be sold at the rate of20 to 30 a year

(continued on page 14)

Volume 2 Number 9

0 ---z

Georgll

(1) Clntrlll Mia

Transition The World BankCECSE

Quotation of the Month Ukraine and Byelorus will clearly be the front runshyners in a new economic alliance Commersant on future inter-republic ties

The real economic independence of sovereign republics will in many ways depend on their

place in inter-republic exchanges These contacts will determine regardshyless of whether an economic agreeshyment is conclud~dor not the business relations of enterprises in the new states their balances of payments and ifthe ruble zone comes apart the exchange rates of their national curshyrencies

The combination of two factors - the export possibilities of the breakaway territories and the formal principles of an economic agreement - will deshycide the evolution of economic condishytions in every lregion Computations demonstrate that under any scenario of forging an economic alliance Ukraine and Byelorus will clearly be the front runners while the Central Asian nations will not be able to achieve economic independence

served in the transitional period and commodity exchanges between them may be based on current prices This possibility is linked to the central authorities position through the Yavlinsky program The inertia of inter-republican contacts is also due to the fact that more than a quarter of republican GNP is involved in intershyregional exchanges

Should this forecast come true Russhysia Ukraine Byelorus and Azershybaijan will remain donors (if one also takes into account republican contrishybutions to exports to third countries) Byelorus and Ukraine will then shoulshyder the heaviest donor burden All other regions will have to be subsishydized because of the lopsided distrishybution of centrally-imported resources and the balance of payments deficits in inter-republican trade However Latvia and Lithuania will almost be able to balance their accounts in dealshy

ing with other regions This will also be true of Georgia Armenia and Moldavia if their political situations stabilize and if the raw materials blockade is lifted

Scenario B Changeover to world prices

Most republics see a way out by conshyverting to world prices on exports to otherregionsand by introducing their own currencies as a means of protectshying their economics Should the nashytional balance of payments be divided completely among republics and they adopt separate currencies two opshytions are possible bull Republics will trade with third counshytries independently on the basis of world prices Payments among reshypublics will also be in hard currency but based on existing ruble prices bull Republics will rely on world prices for commerce among themselves

The most economically independent regions includl~ the Russian repubshylic where products supplied by other republics account for only 8 percent of gross consumption Ukraine (12 pershycent) and Kazakhstan and Azerbaijan (some 16 percent each) Only three of these republics report a surplus in inter-republican trade in current doshymestic prices -- Azerbaijan (+23 pershycent) Russia (+3 percent) and Ukraine (+06 percent) Elsewhere supplies from other republics are reshysponsible for 20 to 25 percent of overshyall consumption and exercise much greater influence on local economies

Scenario A With current prices

Although trade agreements among republics will probably be drastically changed in thl~ near future existing economic relations between entershypri ses in various regions may be pre-

Volume 2 Number 9

Possible dynamics of republican currency rates otter transition to hard currency and world prices In inleNepublican settlements

Ukrllnlln

marchlll BIIlIca krona

9 October 1991

-Transition The World BankCECSE

The two options may actually be phases of the same process Yet neishyther of them provides for preserving an integral hard currency-ruble zone It is possible though that in the first case the ruble will retain the status of a yard-stick in inter-repubshylican exchanges

I n the first case republics less depenshydent on imports from third countries and with a larger export potential may be in a more advantageous posishytion Computations show that Russia will suffer the heaviest balance of payments deficit with imports exshyceeding exports by 137 percent of the entire trade turnover including inshyter-regional exchanges This is beshycause products from third countries account for more than halfof all Russhysian imports For comparisons sake the share of import supplies in Ukraine and Byelorus trailing the Russian republic in this respect is twice as small In addition the deficit will to a large extent be due to the cheapness of raw materials exported to other republics

The Central Asian region will end up in an even worse position with the combined balance of payments deficit there equaling -178 percent Ukraine may also suffer a balance of paymen ts deficit of -63 percent due to the high proportion of supplies from other reshypublics in its overall imports Byelorus in contrast will enjoy a surplus of 5 percent as it is overshywhelmingly in the black in inter-reshypublican exchanges Transcaucasian republics will have a surplus of 15 percent for the same reason

The switch to world prices will change things dramatically Russia will be the only republic with a trade surplus (128 percent of the entire turnover) Ukraine and Kazakhstan will be able to slash their deficits but other reshygions will suffer catastrophically Transcaucasian republics will develop balance of paymen ts deficits at a level of -118 percent with Armenia and Georgia the hardest hit The Central sian regions deficit will burgeon to -215 percent The aggregate Baltic deficit will nearly triple to -213 pershycent and the Moldavian deficit will likely swell to -356 percent

No republic will be able to avoid the disastrous effects of such a downturn The changeover will provoke a severe structural crisis in republics around Russia as hundreds of enterprises running on Russian raw material s go broke An unprecedented recession in unemployment may follow with posshysibly up to 40 percent of the workforce in the Baltics losing their jobs

Russia can be expected to achieve a surplus in trade with Georgia quickly within a month-and-a-half after the switch the Baltics in two months the Central Asian region in two-and-ashyhalfmonths and Kazakhstan in threeshyand-a-halfmonths All indications are thatstructural maneuvering will Sl)on give a boost to the Byelorussian and Ukrainian currencies After a brief transitional period their exchange rates may even appreciate against the ruble because the two republics will enjoy a trade surplus with Russia in agricultural products and food

Efficiency Soviet Style ~~

~~ W_~~s~ ~~

~ ~ bullbull From the Souiet weekly Commersant

october 1991 10

Scenario C Transferrable ruble resuscitated

In the volatile situation of price deforshymities and uncertainty about the dishyvision of foreign debt the republics may preserve the Bank for Foreign Economic Activities (Vneshekoshynombank) as the single agency anshyswerable to third countries for the former USSRs state liabilities and to act as the chief manager of governshymentcredits The republics migh t use Vneshekonombank for transferring all account-settling in exportimport activities to republican foreign trade banks Raising prices on fuel power cotton ferrous and non-ferrous metshyals and possibly grain will be a comshypromise whereby raw material-exshyporting regions will not consider their interests infringed upon and raw material importers will not find themshyselves in a critical state Taking their cue from the defunct COMECON reshypublics can sign state contracts among themselves to supply products at prices that will remain stable for stipumiddot lated periods

In this case inter-republican exshychanges under state contracts and direct agreements between entershyprises in different regions can be served by an imaginary currency (a new transferrable ruble) with a stable exchange rate in relation to hard curshyrency The rate most likely will be regulated by an inter-republican agency patterned on COMECONs International Bank for Economic Coshyoperation - effectively a committee consisting of national bank represenshytatives engaged in facilitating intershyrepublican payments Republics may still introduce their own currencies Fluctuations will be determined mostly by the availability of goods in the markets the currency-creation policies of republican banks and the progress of economic reform in the regions Should this scenario materishyalize regions enjoying a surplus in foreign trade will naturally take the dominant positions in the new Intershynational Bank for Economic Cooperashytion

From Will it really work in the Soviet busimiddot ness weekly Commersant The authors Nikita Kirichenko Lyubou Strizhkova and Vera Shirobakoua comprise a research group

Volume 2 Number 9

Transition The Wor1d BankCECSE

Milestones of Transition

In late October Boris Yeltsin anshynounced a program of drastic ecoshynomic reforms for the Russian republic The plan would free prices and remove subsidies by the end of the year privatize large sections of state-owned industry and agriculture and create a more viable currency (Oil products and some consumer staples such as bread are likely to be excluded from the price liberalization) The price move will be preceded by a financial stabilization program deshysigned to mop up some of the bilshylions of eXCESS rubles in circulashytion and cut the former USSRs deficit slash grants to inefficient enterprises cut defense spending stop fundin~~ for about 70 Soviet ministries as of November 1 and end all economic assistance to forshyeign countries Other measures include dealing with newly indeshypendent Soviet republics in hard currency at world prices ending subsidizationjoining oth er repubshylics in a new economic community and providing safety nets for lowshyincome families Yeltsin proposed a new inter-state bank to be creshyated by Russia and the other reshypublics if the latter refrain from issuing their own currencies and agree to a system under which each republics vote would be proshyportionate to its capital If not Russia would form its own state bank and introduce its oVlm curshyrency said Yeltsin addingthathe was ready to head a new governshyment of national unity Inflation has reached a critical level and 55 percent offcimilies were living beshylow the poverty line he stated

The Europnan Bank for Reconshystruction an d Development is conshysidering establishing a new bank to finance trade from Eastern Eushyrope to the Soviet Union EBRD vice-president Ronald Freeman reminded a Paris conference that several East European countries have approached the EBRD for help in expcrtingto the USSR An

EBRD official in London said such a bank could be set up with the help of the World Bank the IMF the OECD and the EC with the EBRD charged with coordinating the new banks acshytivities EBRD President Jacques Attali raised the idea of creating the bank during the World BankllMF Annual Meeting in Bangkok in Octoshyber

Polands president Lech Walesa has hinted that he might appoint former Finance Minister Leszek Balcerowicz as head of the central bank Walesa wants to reorient economic reforms to soften their impact on the population give each Pole stock in privatized state industries intensify job retraining and stimulate local officials to begin auctioning vacant state property in their areas Poland could have as many as 35 million unemployed next year which would be the highest proshyportion of jobless in Europe saidJerzy Eysymont chief of the Polish Planshyning Office If current trends in the Polish economy continue unemployshyment could reach 16 to 18 percent of the workforce

Last year the Soviet Unions budget deficit reached 300 billion rubles or 25 percent of GNP and according to Soviet estimates it will be over 450 billion next year according to the latest figures of the Soviet central statistics office Goskomstat The Soshyviet money supply shot up sharply between June andAugust when up to 20 billion new rubles went into circushylation The state issued an additional 13 billion rubles during September In addition Soviet oil exports are expected to fall to 14 million barrels a day in the first quarter of 1992 half the level of the corresponding period in 1991 Goskomstat has announced that national income the main indishycator of the USSRs economic perforshymance fell 13 percent in the first nine months of 1991 The grain harvest is expected to be down a quarter from lastyears harvest atjust 160 million tons Goskomstat official Igor Pogosov told reporters that a unified financial

and credit policy has effectively broken down and that the repubshylics are pursuing separate and uncoordinated policies

Romanias new prime minister Theodor Stolojan says his top prishyority is to redress the impoverished economy Recent riots cost Romashynias economy almost $3 billion in delayed foreign loans and lost inshyvestment according to Economy Minister Eugen Dijmarescu The cost ofliving has more than tripled in the past 11 months Official figshyures showed that prices soared 2194 percent between October 1990 and October 1991

Germanys five leading economic research institutes report that western Germanys economic growth will slow to 2 percent in 1992 from 35 percent this year but eastern Germanys recovery shywith growth seen at 12 percent in 1992 following a 10 percent conshytraction this year - will expand united Germanys economy by 25 percent in 1992 In their annual economic report the five institutes predicted that the expansion would be uneven however with strong growth in the construction retail and service sectors and continued weakness in heavy industry

Inter-Korean trade has surged in 1991 totaling 124 million dollars in the first eight months asagainst 25 million dollars for the whole of 1990 Currently North Korea is informally seeking participation from South Korea in a possible Speshycial Economic Zone on the border with China and the USSR

The Chinese economy grew 68 pershycent in the first nine months of 1991 compared with the same period last year this makes the rate for the whole year above 6 percent according to Zhang Zhongji spokesman for the State Statistical Bureau The national economy has regained normal growth but some problems and unstable facshy

(continued on page 15)

Volume 2 Number 9 11 October 1991

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

losses d shy_-~o( f r

r r

gt ~ I

~ 07 ~

---

~Jl ~~

lt ~

Ci ~- ~

~

From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

Transition The World BankCECSE

The latter is what we are undertakshying The first wave the distribution of voucher booklets started in October People are lining up at post offices where the vouchers are sold [A bookshylet of vouchers costs 1000 crowns worth 1000 points toward shares Enterprise shares win be auctioned late next year with share prices set according to demand and supply] At the same time on the supply side we are preparing the bundles offirms the several hundred companiesbeing privatized fully (lr partially via vouchshyers This privatization peak has sevshyeral consequences it will shift a subshystantial portion of state assets to prishyvate hands Just as important it will start a teaching process whereby milshylions ofpeople will start to care about investments and share values

But of course there are hundreds of everyday equally important changes which I do not c(lnsider peaks such as radical reform of the taxation system introduction of the value-added tax and legislation (such as was recently passed) on bankruptcy and on regushylating the stock exchange

The problems are standard and necshyessarily there are unfavorable side effects such as the J-curve [Reforms are accompanied by a steep fall of the economy before it gathers steamjust like the shape of the letter J] The task is to change without the unbearshyable destruction of economic activishyties Many irrational activities such as the artificial demands created by the old system must be eliminated The question is how to do it

Social tensions are remarkably low in Czechoslovakia We really have created a political consensus unlike other countries in the region It is our permanent job to appear in public and preach with strength and clarity about the costs and benefits of the transition process We were able to create a political party [Vaclav Klaus is leader of th e Liberal Democratic Party] that is flO organized constitushyency for economic reform

Concerning the World Banks role indeed we ara more interested in project-oriented financing joint deshyvelopment of our energy resources the financial sactor the telecommu-

Volume 2 Number 9 3

nication systems and protection of our environment We are less intershyested in consultations in technical assistance or in advice on running our economy But I repeat we more than welcome the Banks participashytion in our development projects

Ivan Kostov Minister of Finance for Bulgaria

Q Your delegation came to Bangkok in the midst of a crucial election in Bulgaria You as a leading econoshymist were one of the driving forces behind the restructuring and stabilishyzation program How do you evaluate Bulgarias reform process

A On balance it is clear that we succeeded in liberalizing prices elimishynating barriers to foreign trade setshytingup a functioningforeign exchange market [the rate was about 20 leva

per dollar in the middle of October] and starting to deshymonopolize inshydustry We reshyduced inflation to a manageshyable level However liqshyuidation of the command economys

structures and the consequent faltershying of many enterprises aggravated by new taxes and the collapse of Soshyviet trade as well as the shortage of hard currency even for basic imports have resulted in a production crash [GDP for 1991 is expected to fall 20 percent following a drop of 12 pershycent last year Foreign trade is only 16 percent of its 1989 level and sershyvicing of the 11 billion dollar foreign debt suspended last year is still awaiting rescheduling]

Not much has happened in the area of privatization either A privatization law has been drafted but its approval will be left to the new legislature The legal framework for private farming was created in early 1991 but it has had little effect Systemic changes must be accelerated and beginning in 1993 we can expect recovery of the economy Unemployment is a burnshying issue reaching 10 percent this year One solution could be to encourshyage women - 93 percent of whom are employed - to leave the workforce and return to their families even ifit means a temporary loss of purchasshying power for the families Also the new government has to negotiate with the IMF for a stand-by credit and we hope that World Bank financing will go ahead in areas such as infrastrucshyture highways and telecommunicashytions

From the Polish weekly Nie

October 1991

-------------------~- -------------shyThe World BankCECSE

--i Ruogu Deputy Director leopies Bank of China

1 What is the main thrust of reform in China Will central planningdomimiddot cate the scene or will market forces Cike over What is your comment on a pcent article in The Economist that

l in a lS able to achieve a spectacular ~ nnual growth race thanks to the speshyIial economic zones and despite the IIfYiciaily endorsed policies

A We started the Dresent course of economic reform 12 years ago Now we want to move forward in several fields Price liberalization will conshylinue even basic prices such as for coal and electricity wi II be freed Housmiddot ing reform will go ahead We are inshyLrodudng cost-related rent with a corresponding increase of wages We also have setup special savings banks Lv proVlde credits for housing Develshyopng the social safety system means introducing unemployment benefits creating training facilities and proshyviding security for the temporarily unemployed We are also progressing on enterprise reform making state companies stand on their own Lossshymakers will be liquidated or they will have to merge with more efficient en terprises (1n other countries] mass privatization of large- and mediumshysized enterprises is not the only solushyLion If enterprises are efficient it does not matter whether they are ~tDtemiddotowned or privately owned

f) country can be described as a pure market or a pure planned economy Governments have numerous tasks ltyen in the self-acclaimed market economies Planning is still very imshyportant In a country the size of China but I think market forces will prevail m the future P1anning however will

not fade away rather its traits will change with a focus on longershyterm policy isshysues Planning agencies will beshycome more effishycient and forshyward-looking and able to deshyvise alternative scenarios for the next 5-10 years

0ctober i991

thus enabling enterprises to adjust their strategies accordingly

In the southern part of China ecoshynomic development is very dynamic for several reasons Policies are more flexible and there has been longer experience with economic manageshyment compared to other parts of China Those provinces and cities are close to Macao Hong Kong and the southern Asian countries and their products are exported via HongKong the liaison to these areas Forlign investments are abundant Thesl~ reshygions are called the windows to the international economy through which experiences are gained skills learned and foreign trade developed with benefits spread all over the country These windows can be enlarged in the years to come until the ever-larger building will have only glass walls

The views expressed by Li Ruogu are hi8 own and were not expressed on behalfDf the Chinese delegation Dr the Chinese Gouemment

Kigoma A Malima Minister of State for Planning in Tanzania

Q What is the main lesson from the collapse ofcommunism for Tanzania once a bastion of African socialism Will the countrys economic policy change course endorsing private enmiddot terprise

A The fall of socialism in Eastern Europe reminded us that it is not enough to provide employment or inshycrease real income People also have to get involved in policyrnaking They need assurances that excessive power can be controlled Therefore Tanzashynia is addressing the issues of politishycal democratization as well as ecoshynomic liberalization

The Foreign Investment Code apshyproved last year is a very clear sign that the government is favoring prishyvate investments whether they are local or foreign Last July the InvE~stshyment Promotion Center was set up Price liberalization is making headshyway of the 350 commodities that were controlled in the 1980s only 10 now remain under price restrictions lhe share in the economy for the private sector is substantial 40middot50 percent of

4

agricultural production is in private hands for example Unprofitable pubshylic enterprises will be sold off and we expect more active participation by the private sector in developing the economy Mass privatization is adifshyficult question however In colonial Africa the economic stratification of the society was developed on a racial basis with whites and Indians occushypying the key economic and business positions After independence the Tanzanization of the economy meant that the state sector played a domishynant role Our own entrepreneurial class has to be developed and edushycated and this takes time

Changing economic course in the sen se of reducing cen tralized burea ushycratic control Yes but for creating an egalitarian and just society our course will not change We must be conscious of the dangers of excessive inequalities in society when a few

have so much and many so little The government aims at social harshymonization guarshyanteeing equal opportunities for education health services and genshyeral social welshyfare Leadership ethics and prinshyciples must be kept

The economic difficulties are enorshymous Our savings rate is low The country badly needs a well paid moshytivated highly efficient civil service The brain drain is getting worse the best professionals and civil sershyvants leave the country because they are not willing to serve for 120 dollars per month - in Botswana they can make 2000 dollars As a result inefshyficient bureaucratic red tape is serishyously hindering investment in Tanshyzania This is one of the reasons for the slow progress the GNP is growshying about 4 percent annually but population growth is 27 percent The greatest problem is how to accelerate the growth rate and the World Bank can support our goals But a well functioning government is a basic neshycessity

Volume 2 Number 9

Pro-Market Economyl Pro-Market Economyl Social Costs APIJreClalCle Costs Negligible

Unclassified

Anti-Market Economyl SOCial Costs Too High

Transition The World BankCECSE

Poles Support Market Economy with Caution Opinion poll reveals split society

N early twel years of shock therapy have taken their toll on the Polish publics willingshy

ness to endure economic hardship according to a series of nationwide public opinion polls commissioned by the US Information Agency In early 1990 more than 56 percent of Poles thought that Finance Minister Balcerowiczs radical economic reform program correctly addressed Polands economic woes But public support quickly waned as the adversity ofthe reform process became a daily realshyity By late 1990 only 30 percent favored radical economic reform and by mid-1991 support had dwindled to 17 percent In contrast a solid majority of Poles - 72 percent as of mid-1991 - said they preferred a program of gradual reform [This cershytainly helps to explain the huge abshystention rate - tiQ percent - and the inconclusive results of the recent parshyliamentary election]

However public favor of two key comshyponents of reform - private ownershyship and foreign investment - inshycreased in the six months up to midshy1991 As of late 1990 48 percent of Poles thought most businesses should be owned by the state while 39 pershycent thought they should be privately owned By mid-1991 support for privatization had risen to 45 percent Support for private ownership of bus ishyness was highest among the young (18-29) the university-educated and urbanites NevErtheless Poles still voice less support for privatization if it is thought to affect them personshyally For examplejust three in ten of those who worked for state-owned firms said they wanted their firms to be privatized five in ten said they did not and the rest of those surveyed offered no opinion Those who supshyported privatization were more optishymistic about their long-term economic future and were likely to favorradical reform In terms of support for

privatization of specific industries farms and restaurants were cited the most while heavy industry schools health care and the railroads were least likely to be favored for privatization

In contrast to public opinion in late 1990 when 44 percent of Poles thought foreign investments would not be helpful and would cause Poshyland to become dependent on foreignshyers just 33 percent voiced this conshycem six months later Instead 57 percent of Poles primarily the young and the well-educated voiced supshyport for foreign businesses investing in Poland Asked which Western counshytries companies were most actively pursuing business opportunities in Poland46 percent said Germany and 20 percent cited the United States Yet when asked which countries were preferred as investors nearly twice as many cited the US (56 percent) as Germany (29 percent) France (26 percent) and Japan (23 percent) were also preferred investors

Given the burdens of economic transhysition in Poland it is hardly surpris-

Market orientations among the Polish public

Source USIA OffICe ofResearch CEE branch

ing that in 1991 economic questions topped the publics list of the most urgent issues facing the country Unshyemployment headed the list of conshycems for women the young workers those with a secondary education and those living in mid-sized cities The cost of living the need for more order in the economy the economic reform process and agricultural issues comshypleted the roster of urgent economic concems In contrast to their conshycerns about economicissues few Poles cited such political issues as political stability development offreedom and democracy or removing former comshymunistsfrom power as being of much urgency In late 1990 public attenshytion had been somewhat more evenly divided between political and ecoshynomic issues The shift in attitude not only suggests the depth of public conshycern about the economic changes ocshycurring in PoIan d but also illustrates the view that most Poles do not beshylieve there are looming threats to Polands new pluralistic system of government

In mid-1991 most Poles expressed a positive attitude toward a market

Volume 2 Number 9 5 October 1991

Transition The World BankCECSE

econ omy 85 percen t believed that an economy only functions if business people make a profit and that this benefits the whole society in the long run More specifically 67 percent thought that under a free market economy some people might have a lot more money than others but in the long run everybody is better off th an under socialism Likewise seven in ten of the Poles surveyed indicated that private property is necessary for economic progress and six in ten thought a democratic society was posshysible only under a market economy Overall the young and the well-edushycated were the most likely to agree with these statements

Even so many Poles showed concern about particular aspects of a market economy More than 59 percent said they believed that people are more exploited when they work for a primiddot vate business than when they work for a state-controlled one A similar percentage believed that a market economy is characterized by coldness in human relationships But only 35 percent thought private property was a major cause of social injustice in society while 75 percent said unemshyployment would be too high in a marshyket economy and a similar number thought that there were too few safeshyguards for weaker members of socishyety Overall the less educated and older Poles were the most likely to express concern about the effects ofa market economy

As these data show the Polish govshyernment clearly faces a problem shy

Polish Perspective on MClrket-Economy Three Categories

bull A Pro-Market Economy Social Costs Negligible group (25 percent of Poles) Tends to believe that thi benefits ofa market economy outweigh thi liabilities Overall this group expresses the most satisfaction with the new state of affairs in Poland is optimistic about economic developshyments and favors radical economic reform Group members tend to be university educated under 30 years of age interested in politics and living in large urban areas

bull All Anti-Market Economy Social Costs Too High group (15 percent) Expresses a negative view of the political and economic situation and of radical economic reform A disproportionately high percentage ofPoles in this group live in rural areas are skilled or unskilled workers are less educated and are not interested in politics

bull A Pro-Market Economy Social Cost Appreciable group (58 percent) Is uncertain whether the benefits ofa market economy outweigh the costs and its evaluation ofpolitical and economic measures falls between the opinions of the othir two groups For example about half expressed satisfaction with thi performance of the national government but most were pessimistic about thi current and future economic situation Only 10 percent voiced support for radical economic reform This group differs demographically very little from thi general population (see figure previous page)

the publics willingness to endure proshylonged economic hardship has diminshyished and a majority remain uncershytain about the benefits of the new economy During his 1991 presidenshytial election campaign President u~ch Walesa promised to accelerate the process of reform This was apparshyently interpreted by many Poles to mean less hardship and more prosshyperity But the bedrock of Walesas economic program remains con tinued austerity Unless more Poles begin to prosper or at least think they will

prosper soon public opinion is likely to turn against the government One group however appears to transcend the public fray over economic reform measures - foreign investors Many Poles welcome foreign investment and prefer American investors over othshyers

Mary McIntosh chiefof the CEE unit Martha Abele MacIver research analyst CEE OffICe ofResearch USIA

Letters to the Editor A Walk or a Rush shy

here is an opinion eloquently argued both inside and outside the Bank that the East EuroshyT

pean countries should learn from Chinas success with gradual economic reform to modify their more radical approaches toward creation of a marshyket economy The presumption is that slow piecemeal reforms and secondshybest policies such as multiple exshychange rates industrial policy trade

October 1991

Comments on IJ Singhs recent article

barriers and continued use of subsishydies will minimize the social costs of transition while advancing refo rm far enough to tap the efficiency gains from a more liberal economic order Both the presumption and the argushyment fail to take account of fundashymental differences between China and Eastern Europe For example GNP per capita the international environshyment the role and performance of

6

agriculture the overall performance of the state sector market size and the long-term costs ofinterventionist policies are vastly different between China on the one hand and Eastern Europe and the Soviet Union on the other All this points up that a Chimiddot nese-style go-slow reform of the sysshytem and policy in Eastern Europe would be a recipe for prolonged stagshynation ifnot economic disaster

Volume 2 Number 9

Transition The World BonkCECSE

First China is at an early stage of development enjoying high growth rates because inter alia its starting base was low and growth is still largely extensive (Le originating mostly from the expansion of factors of production rather than from a pure increase in factor productivity) Sevshyeral decades ago when Eastern Euroshypean economies were similar to the current Chinese economy in terms of economic structure and level of de velshyopment they too achieved high growth rates despite highly centralshyized and autocratic systems Howshyever we know today that a lot of that growth (statistical problems aside) occurred in military and heavy indusshytry thus hardly contributing to the main goal of development a sustainshyable increase in the standard of livshying Nowadays Eastern Europe has mature but grossly Inefficient econoshymies that can be revitalized only through relatively fast restructuring and liberalization ofdomestic and forshyeign activities Slow reform will block change while er1suring a stagnantstashytus QUO

Second Eastern European economies are small and necessarily open econoshymies that havl~ much to gain right now from the exchange of knowledge technology investment and ideas with the EuropElan Community While China can affOld some isolation from the world markets mainly due to its immense size I~asternEurope clearly cannot In addition Eastern Europe is the textbook example of small open economies forced to adjust to permashynent sho(ks It is unlikely that China will face external shocks of similar magnitude in the near future conseshyquently there is much less urgency for a radical change Highly intervenshytionist policies which China is pursushying at this stage would almost cershytainly isolate Eastern Europe from the benefits 0 integration into the European Community

Third contrary to some perceptions the dramatic dEcline in output in Eastshyern Europe OVEr the past two years is systemic and as much the result of long-term problems as of short-term exogenous shc1cks such as the colshylapse of the CMEA and the use of restrictive stabilization programs Just as no stabilization of a

Volume 2 Number 9

hyperinflationary economy is achieved without a fast break on inshyflation sources no structural reform in Eastern Europe can succeed withshyout Quickly arresting the systemic causes of extreme structural imbalshyances and inefficiencies the wrong incentives for workers and managshyers overextension of state ownership and interference in the economy sysshytemic pervasive andarbitrary subsishydization and lack of accountability reward and effort

Fourth in Eastern Europe the perforshymance of state en terprises and banks the cornerstones of an economy is appalling compared to the situation for these institutions in China Eastshyern Europes state enterprises and banks have been undergoing reform and introducing various market crishyteria for more than a decade (for sevshyeral decades in Yugoslavia) but they have failed to bring about substan tial results This is because the governshyments failed to alter fundamentally the structure of ownership and the corresponding microeconomic incenshytives In Yugoslavia frequentinstitushytionalreform and continuous institushytional experimentation were followed by extreme financial indiscipline and the entropy of the system In fact the country grew more rapidly before reshyform Slow reform in Hungary and Poland over the past decade created instability and was accompanied by expansion of the black market economy In Bulgaria for a full year after the overthrow of the Zivkov govshyernment failure to start systemic reshyform contributed to the severe downshyturn of the economy Clearly pieceshymeal reform never managed to reshyverse the continuous decline of the East European economies a decline that became more drastic and obvishyous only in the past two years

Fifth as long as Chinas piecemeal reforms work its government will not want to embark on more radicalreshyform that it cannot easily controL In China peer pressure the Commushynist party influence and family and community ties apparently work as important complements to 01 substishytutes for the standard market incenshytives In Eastern Europe these facshytors effectively dissolved in the tushymult of the disappearance of the poshy

7

litical monopoly while market incenshytives are still to develop with the emerging private sector Given the incentive and institutional gaps the need for privatization in Eastern Eushyrope is mOre urgent than it would be in China for example Although the entry into the market of new private firms is already impressive it cannot alter the character of these economies in the immediate future and thus privatization is the pragmatic imperashytive of the day And the longer it is delayed the clearer it will become that the all-encompassing state secshytor alone cannot pull the economies out of their depression

Finally the international economic environment and the strong integrashytion forces at work in Western Europe clearly favor countries that are firmly committed to radical reform and free market policies Why should Eastern Europe not take advantage of this historic opportunity to get the best of the West and in record time The readiness of the West to provide adshyvice technical expertise and knowshyhow is more critical for Eastern Eushyrope than is a deluge of money at this time short of humanitarian aid and the economieslifeblood of short-term trade credits For their own benefit East European countries need to implement systemic reform particushylarly privatization as quickly as posshysible Waiting will delay the benefits of reform too far into the future while the costs will grow and possibly strangle the current changes

Zeljko Bogetic EM5CO The World Bcmk

Bela Csikos-Nagy

Whatever actually happens in Censhytral and Eastern Europe (CEE) and China is there really only a two-track approach to economic reform Inderji t Singhs excellent article in Transishytion touches on the concerns about countries with a socialist economic pattern

N everthelesslet me look at this probshylem from a different point of view Ido not believe that CEE on the one side

October 1991

Transition The World BonkCECSE

and China on the other can be examshyined at the same level In CEE a World BankjlMF Agendasystem transfonnation is going on whereas in China only the refonn of socialist economic planning is on the agenda In the first case a transforshymation Can be observed - from a socialist economy to a social market system and what happens is actually a re-capitalization process In conshytrast China wants to transfonn its socialist commodity-producing economy into a socialist market sysshytem What actually is happening in China (including the restoration of quasi-private property rights) is simishylar to the Hungarian economic refonn of the early 1980s

The two-track approach certainly exshyists although only in the context of Central and Eastern Europe Investishygating the matter from this aspect the issues debated in the article must be expanded I suggest addressing the following bull privatization vs reprivatization bull popular privatization vs the comshymercial variant bull liberalization and deregulation a hannonized vs a controversial solushytion bull social cost narrow vs widespread interpretation and bull maintaining international solvency vs suspending debt servicing etc

Last but not least as I see it the author was influenced by the overshywhelming view so typical of the peshyriod 1989-90 the time when shock therapy was considered to be an adshyequate remedy for crisis management in post-communist societies This comes to the fore strikingly in the paragraph headed Pricerefonn radishycal vs piecemeal I do not think the actual situation at the end of 1991 is what was expected by policymakers propounding this line in 198990

Bela Csik6smiddotNagy is a prominent economist and president of tlu Hungarian Eronomic Asmiddot sociaticn

Moscow Joke

QueBlion What is the new relationshyship among the pound the dollar and

i the ruble

Anwer A pound of rubles =1 dollar

October 1991

First aid from the Sisters

With the USSR now a special associshyate member of the IMF the Fund can begin immediate and wide-ranging technical assistance IMF experts are already in Moscow providing advice on macroeconomic policies exchange and payments systems tax and blmkshying reform and statistics and Soviet officials will be invited to IMF trainshyingcourses in Washington The stipushylations for the fonner Soviet Unions special association can beextended to individual Soviet republics as well The World Bank signed a technical assistance agreement the USSR and the Republics to be financed from a $30 million trust fund The agreeshyment focuses on assisting developshyment of a social safety net reforming the energy agriculture and housing sectors and other key industries deshyvelopingthe private sector and trainshying officials The Bank will also open an office in Moscow to facilitate the implementation of the agreement

IFC in CEE

According to the International Fishynance Corporations recent annual report the greatest expansion of its investment activity in the 1990s will occur in Central and Eastern Europe Out of an expected $4 billion a year in finanCing the IFC expects to approve up to $350 million annually for the CEE region - a 190 percent increase overthe amount approved in FY1991 Algeria Czechoslovakia Mongolia Namibia Romania and Bulgaria have joined the IFC in the past year raisshying the number of member countries to 142

Financial boost to Nicaragua

The World Bank approved a fast-disshybursing $110 million economic reshycoverycredit to Nicaragua from IDA the Banks concessionary-lending afshyfiliate The credit is providing supshyport to cut public sector employment revitalize the civil service reform the financial sector (provide a new regushylatory body and license four private

8

banks) and privatize vast sectors of the economy (return 350 state-owned businesses to the private sector) The IDA credit also supports the introshyduction of trade tax and regulatory reforms to promote private-sector proshyduction The Inter-American Develshyopment Bank is expected to co-finance the IDA credit with $130 million In addition the IMF recently approved a $557 million standby loan At the same time IDA is mobilizing addishytional concessional aid through its chairmanship of Nicaraguas consulshytative group of aid donors

Romanias health care

Romania will begin overhauling its health-care system control the spread of AIDS and improve family-planshyning services through a project supshyported by a $150 million World Bank loan (see TRANSITION September 1991) The project aims to reverse the worsening health conditions and imshyprove the health-care system It inshycludes improvements to rural healthshycare centers a health-education camshypaign strengthened family-planning programs training for health-care workers and provision of medical supplies for hospitals and other health facilities The loan will finance imshyports of medical supplies including disposable syringes and autoclaves The project will make birth control devices affordable and widely availshyable

Support to Laos

An IDA credit of$40 million will proshymote the Laotian Governments efshyforts to institute a market economy The credit wil1 support public entershyprise reform and privatization efforts to boost government revenues and measures to improve the management of public resources The governments privatization program began in 1991 The Bank will assist with auctioning offsmall public enterprises over the next three years Larger public en tershyprises with 30 or more employees will be sold at the rate of20 to 30 a year

(continued on page 14)

Volume 2 Number 9

0 ---z

Georgll

(1) Clntrlll Mia

Transition The World BankCECSE

Quotation of the Month Ukraine and Byelorus will clearly be the front runshyners in a new economic alliance Commersant on future inter-republic ties

The real economic independence of sovereign republics will in many ways depend on their

place in inter-republic exchanges These contacts will determine regardshyless of whether an economic agreeshyment is conclud~dor not the business relations of enterprises in the new states their balances of payments and ifthe ruble zone comes apart the exchange rates of their national curshyrencies

The combination of two factors - the export possibilities of the breakaway territories and the formal principles of an economic agreement - will deshycide the evolution of economic condishytions in every lregion Computations demonstrate that under any scenario of forging an economic alliance Ukraine and Byelorus will clearly be the front runners while the Central Asian nations will not be able to achieve economic independence

served in the transitional period and commodity exchanges between them may be based on current prices This possibility is linked to the central authorities position through the Yavlinsky program The inertia of inter-republican contacts is also due to the fact that more than a quarter of republican GNP is involved in intershyregional exchanges

Should this forecast come true Russhysia Ukraine Byelorus and Azershybaijan will remain donors (if one also takes into account republican contrishybutions to exports to third countries) Byelorus and Ukraine will then shoulshyder the heaviest donor burden All other regions will have to be subsishydized because of the lopsided distrishybution of centrally-imported resources and the balance of payments deficits in inter-republican trade However Latvia and Lithuania will almost be able to balance their accounts in dealshy

ing with other regions This will also be true of Georgia Armenia and Moldavia if their political situations stabilize and if the raw materials blockade is lifted

Scenario B Changeover to world prices

Most republics see a way out by conshyverting to world prices on exports to otherregionsand by introducing their own currencies as a means of protectshying their economics Should the nashytional balance of payments be divided completely among republics and they adopt separate currencies two opshytions are possible bull Republics will trade with third counshytries independently on the basis of world prices Payments among reshypublics will also be in hard currency but based on existing ruble prices bull Republics will rely on world prices for commerce among themselves

The most economically independent regions includl~ the Russian repubshylic where products supplied by other republics account for only 8 percent of gross consumption Ukraine (12 pershycent) and Kazakhstan and Azerbaijan (some 16 percent each) Only three of these republics report a surplus in inter-republican trade in current doshymestic prices -- Azerbaijan (+23 pershycent) Russia (+3 percent) and Ukraine (+06 percent) Elsewhere supplies from other republics are reshysponsible for 20 to 25 percent of overshyall consumption and exercise much greater influence on local economies

Scenario A With current prices

Although trade agreements among republics will probably be drastically changed in thl~ near future existing economic relations between entershypri ses in various regions may be pre-

Volume 2 Number 9

Possible dynamics of republican currency rates otter transition to hard currency and world prices In inleNepublican settlements

Ukrllnlln

marchlll BIIlIca krona

9 October 1991

-Transition The World BankCECSE

The two options may actually be phases of the same process Yet neishyther of them provides for preserving an integral hard currency-ruble zone It is possible though that in the first case the ruble will retain the status of a yard-stick in inter-repubshylican exchanges

I n the first case republics less depenshydent on imports from third countries and with a larger export potential may be in a more advantageous posishytion Computations show that Russia will suffer the heaviest balance of payments deficit with imports exshyceeding exports by 137 percent of the entire trade turnover including inshyter-regional exchanges This is beshycause products from third countries account for more than halfof all Russhysian imports For comparisons sake the share of import supplies in Ukraine and Byelorus trailing the Russian republic in this respect is twice as small In addition the deficit will to a large extent be due to the cheapness of raw materials exported to other republics

The Central Asian region will end up in an even worse position with the combined balance of payments deficit there equaling -178 percent Ukraine may also suffer a balance of paymen ts deficit of -63 percent due to the high proportion of supplies from other reshypublics in its overall imports Byelorus in contrast will enjoy a surplus of 5 percent as it is overshywhelmingly in the black in inter-reshypublican exchanges Transcaucasian republics will have a surplus of 15 percent for the same reason

The switch to world prices will change things dramatically Russia will be the only republic with a trade surplus (128 percent of the entire turnover) Ukraine and Kazakhstan will be able to slash their deficits but other reshygions will suffer catastrophically Transcaucasian republics will develop balance of paymen ts deficits at a level of -118 percent with Armenia and Georgia the hardest hit The Central sian regions deficit will burgeon to -215 percent The aggregate Baltic deficit will nearly triple to -213 pershycent and the Moldavian deficit will likely swell to -356 percent

No republic will be able to avoid the disastrous effects of such a downturn The changeover will provoke a severe structural crisis in republics around Russia as hundreds of enterprises running on Russian raw material s go broke An unprecedented recession in unemployment may follow with posshysibly up to 40 percent of the workforce in the Baltics losing their jobs

Russia can be expected to achieve a surplus in trade with Georgia quickly within a month-and-a-half after the switch the Baltics in two months the Central Asian region in two-and-ashyhalfmonths and Kazakhstan in threeshyand-a-halfmonths All indications are thatstructural maneuvering will Sl)on give a boost to the Byelorussian and Ukrainian currencies After a brief transitional period their exchange rates may even appreciate against the ruble because the two republics will enjoy a trade surplus with Russia in agricultural products and food

Efficiency Soviet Style ~~

~~ W_~~s~ ~~

~ ~ bullbull From the Souiet weekly Commersant

october 1991 10

Scenario C Transferrable ruble resuscitated

In the volatile situation of price deforshymities and uncertainty about the dishyvision of foreign debt the republics may preserve the Bank for Foreign Economic Activities (Vneshekoshynombank) as the single agency anshyswerable to third countries for the former USSRs state liabilities and to act as the chief manager of governshymentcredits The republics migh t use Vneshekonombank for transferring all account-settling in exportimport activities to republican foreign trade banks Raising prices on fuel power cotton ferrous and non-ferrous metshyals and possibly grain will be a comshypromise whereby raw material-exshyporting regions will not consider their interests infringed upon and raw material importers will not find themshyselves in a critical state Taking their cue from the defunct COMECON reshypublics can sign state contracts among themselves to supply products at prices that will remain stable for stipumiddot lated periods

In this case inter-republican exshychanges under state contracts and direct agreements between entershyprises in different regions can be served by an imaginary currency (a new transferrable ruble) with a stable exchange rate in relation to hard curshyrency The rate most likely will be regulated by an inter-republican agency patterned on COMECONs International Bank for Economic Coshyoperation - effectively a committee consisting of national bank represenshytatives engaged in facilitating intershyrepublican payments Republics may still introduce their own currencies Fluctuations will be determined mostly by the availability of goods in the markets the currency-creation policies of republican banks and the progress of economic reform in the regions Should this scenario materishyalize regions enjoying a surplus in foreign trade will naturally take the dominant positions in the new Intershynational Bank for Economic Cooperashytion

From Will it really work in the Soviet busimiddot ness weekly Commersant The authors Nikita Kirichenko Lyubou Strizhkova and Vera Shirobakoua comprise a research group

Volume 2 Number 9

Transition The Wor1d BankCECSE

Milestones of Transition

In late October Boris Yeltsin anshynounced a program of drastic ecoshynomic reforms for the Russian republic The plan would free prices and remove subsidies by the end of the year privatize large sections of state-owned industry and agriculture and create a more viable currency (Oil products and some consumer staples such as bread are likely to be excluded from the price liberalization) The price move will be preceded by a financial stabilization program deshysigned to mop up some of the bilshylions of eXCESS rubles in circulashytion and cut the former USSRs deficit slash grants to inefficient enterprises cut defense spending stop fundin~~ for about 70 Soviet ministries as of November 1 and end all economic assistance to forshyeign countries Other measures include dealing with newly indeshypendent Soviet republics in hard currency at world prices ending subsidizationjoining oth er repubshylics in a new economic community and providing safety nets for lowshyincome families Yeltsin proposed a new inter-state bank to be creshyated by Russia and the other reshypublics if the latter refrain from issuing their own currencies and agree to a system under which each republics vote would be proshyportionate to its capital If not Russia would form its own state bank and introduce its oVlm curshyrency said Yeltsin addingthathe was ready to head a new governshyment of national unity Inflation has reached a critical level and 55 percent offcimilies were living beshylow the poverty line he stated

The Europnan Bank for Reconshystruction an d Development is conshysidering establishing a new bank to finance trade from Eastern Eushyrope to the Soviet Union EBRD vice-president Ronald Freeman reminded a Paris conference that several East European countries have approached the EBRD for help in expcrtingto the USSR An

EBRD official in London said such a bank could be set up with the help of the World Bank the IMF the OECD and the EC with the EBRD charged with coordinating the new banks acshytivities EBRD President Jacques Attali raised the idea of creating the bank during the World BankllMF Annual Meeting in Bangkok in Octoshyber

Polands president Lech Walesa has hinted that he might appoint former Finance Minister Leszek Balcerowicz as head of the central bank Walesa wants to reorient economic reforms to soften their impact on the population give each Pole stock in privatized state industries intensify job retraining and stimulate local officials to begin auctioning vacant state property in their areas Poland could have as many as 35 million unemployed next year which would be the highest proshyportion of jobless in Europe saidJerzy Eysymont chief of the Polish Planshyning Office If current trends in the Polish economy continue unemployshyment could reach 16 to 18 percent of the workforce

Last year the Soviet Unions budget deficit reached 300 billion rubles or 25 percent of GNP and according to Soviet estimates it will be over 450 billion next year according to the latest figures of the Soviet central statistics office Goskomstat The Soshyviet money supply shot up sharply between June andAugust when up to 20 billion new rubles went into circushylation The state issued an additional 13 billion rubles during September In addition Soviet oil exports are expected to fall to 14 million barrels a day in the first quarter of 1992 half the level of the corresponding period in 1991 Goskomstat has announced that national income the main indishycator of the USSRs economic perforshymance fell 13 percent in the first nine months of 1991 The grain harvest is expected to be down a quarter from lastyears harvest atjust 160 million tons Goskomstat official Igor Pogosov told reporters that a unified financial

and credit policy has effectively broken down and that the repubshylics are pursuing separate and uncoordinated policies

Romanias new prime minister Theodor Stolojan says his top prishyority is to redress the impoverished economy Recent riots cost Romashynias economy almost $3 billion in delayed foreign loans and lost inshyvestment according to Economy Minister Eugen Dijmarescu The cost ofliving has more than tripled in the past 11 months Official figshyures showed that prices soared 2194 percent between October 1990 and October 1991

Germanys five leading economic research institutes report that western Germanys economic growth will slow to 2 percent in 1992 from 35 percent this year but eastern Germanys recovery shywith growth seen at 12 percent in 1992 following a 10 percent conshytraction this year - will expand united Germanys economy by 25 percent in 1992 In their annual economic report the five institutes predicted that the expansion would be uneven however with strong growth in the construction retail and service sectors and continued weakness in heavy industry

Inter-Korean trade has surged in 1991 totaling 124 million dollars in the first eight months asagainst 25 million dollars for the whole of 1990 Currently North Korea is informally seeking participation from South Korea in a possible Speshycial Economic Zone on the border with China and the USSR

The Chinese economy grew 68 pershycent in the first nine months of 1991 compared with the same period last year this makes the rate for the whole year above 6 percent according to Zhang Zhongji spokesman for the State Statistical Bureau The national economy has regained normal growth but some problems and unstable facshy

(continued on page 15)

Volume 2 Number 9 11 October 1991

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

losses d shy_-~o( f r

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~ 07 ~

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From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

-------------------~- -------------shyThe World BankCECSE

--i Ruogu Deputy Director leopies Bank of China

1 What is the main thrust of reform in China Will central planningdomimiddot cate the scene or will market forces Cike over What is your comment on a pcent article in The Economist that

l in a lS able to achieve a spectacular ~ nnual growth race thanks to the speshyIial economic zones and despite the IIfYiciaily endorsed policies

A We started the Dresent course of economic reform 12 years ago Now we want to move forward in several fields Price liberalization will conshylinue even basic prices such as for coal and electricity wi II be freed Housmiddot ing reform will go ahead We are inshyLrodudng cost-related rent with a corresponding increase of wages We also have setup special savings banks Lv proVlde credits for housing Develshyopng the social safety system means introducing unemployment benefits creating training facilities and proshyviding security for the temporarily unemployed We are also progressing on enterprise reform making state companies stand on their own Lossshymakers will be liquidated or they will have to merge with more efficient en terprises (1n other countries] mass privatization of large- and mediumshysized enterprises is not the only solushyLion If enterprises are efficient it does not matter whether they are ~tDtemiddotowned or privately owned

f) country can be described as a pure market or a pure planned economy Governments have numerous tasks ltyen in the self-acclaimed market economies Planning is still very imshyportant In a country the size of China but I think market forces will prevail m the future P1anning however will

not fade away rather its traits will change with a focus on longershyterm policy isshysues Planning agencies will beshycome more effishycient and forshyward-looking and able to deshyvise alternative scenarios for the next 5-10 years

0ctober i991

thus enabling enterprises to adjust their strategies accordingly

In the southern part of China ecoshynomic development is very dynamic for several reasons Policies are more flexible and there has been longer experience with economic manageshyment compared to other parts of China Those provinces and cities are close to Macao Hong Kong and the southern Asian countries and their products are exported via HongKong the liaison to these areas Forlign investments are abundant Thesl~ reshygions are called the windows to the international economy through which experiences are gained skills learned and foreign trade developed with benefits spread all over the country These windows can be enlarged in the years to come until the ever-larger building will have only glass walls

The views expressed by Li Ruogu are hi8 own and were not expressed on behalfDf the Chinese delegation Dr the Chinese Gouemment

Kigoma A Malima Minister of State for Planning in Tanzania

Q What is the main lesson from the collapse ofcommunism for Tanzania once a bastion of African socialism Will the countrys economic policy change course endorsing private enmiddot terprise

A The fall of socialism in Eastern Europe reminded us that it is not enough to provide employment or inshycrease real income People also have to get involved in policyrnaking They need assurances that excessive power can be controlled Therefore Tanzashynia is addressing the issues of politishycal democratization as well as ecoshynomic liberalization

The Foreign Investment Code apshyproved last year is a very clear sign that the government is favoring prishyvate investments whether they are local or foreign Last July the InvE~stshyment Promotion Center was set up Price liberalization is making headshyway of the 350 commodities that were controlled in the 1980s only 10 now remain under price restrictions lhe share in the economy for the private sector is substantial 40middot50 percent of

4

agricultural production is in private hands for example Unprofitable pubshylic enterprises will be sold off and we expect more active participation by the private sector in developing the economy Mass privatization is adifshyficult question however In colonial Africa the economic stratification of the society was developed on a racial basis with whites and Indians occushypying the key economic and business positions After independence the Tanzanization of the economy meant that the state sector played a domishynant role Our own entrepreneurial class has to be developed and edushycated and this takes time

Changing economic course in the sen se of reducing cen tralized burea ushycratic control Yes but for creating an egalitarian and just society our course will not change We must be conscious of the dangers of excessive inequalities in society when a few

have so much and many so little The government aims at social harshymonization guarshyanteeing equal opportunities for education health services and genshyeral social welshyfare Leadership ethics and prinshyciples must be kept

The economic difficulties are enorshymous Our savings rate is low The country badly needs a well paid moshytivated highly efficient civil service The brain drain is getting worse the best professionals and civil sershyvants leave the country because they are not willing to serve for 120 dollars per month - in Botswana they can make 2000 dollars As a result inefshyficient bureaucratic red tape is serishyously hindering investment in Tanshyzania This is one of the reasons for the slow progress the GNP is growshying about 4 percent annually but population growth is 27 percent The greatest problem is how to accelerate the growth rate and the World Bank can support our goals But a well functioning government is a basic neshycessity

Volume 2 Number 9

Pro-Market Economyl Pro-Market Economyl Social Costs APIJreClalCle Costs Negligible

Unclassified

Anti-Market Economyl SOCial Costs Too High

Transition The World BankCECSE

Poles Support Market Economy with Caution Opinion poll reveals split society

N early twel years of shock therapy have taken their toll on the Polish publics willingshy

ness to endure economic hardship according to a series of nationwide public opinion polls commissioned by the US Information Agency In early 1990 more than 56 percent of Poles thought that Finance Minister Balcerowiczs radical economic reform program correctly addressed Polands economic woes But public support quickly waned as the adversity ofthe reform process became a daily realshyity By late 1990 only 30 percent favored radical economic reform and by mid-1991 support had dwindled to 17 percent In contrast a solid majority of Poles - 72 percent as of mid-1991 - said they preferred a program of gradual reform [This cershytainly helps to explain the huge abshystention rate - tiQ percent - and the inconclusive results of the recent parshyliamentary election]

However public favor of two key comshyponents of reform - private ownershyship and foreign investment - inshycreased in the six months up to midshy1991 As of late 1990 48 percent of Poles thought most businesses should be owned by the state while 39 pershycent thought they should be privately owned By mid-1991 support for privatization had risen to 45 percent Support for private ownership of bus ishyness was highest among the young (18-29) the university-educated and urbanites NevErtheless Poles still voice less support for privatization if it is thought to affect them personshyally For examplejust three in ten of those who worked for state-owned firms said they wanted their firms to be privatized five in ten said they did not and the rest of those surveyed offered no opinion Those who supshyported privatization were more optishymistic about their long-term economic future and were likely to favorradical reform In terms of support for

privatization of specific industries farms and restaurants were cited the most while heavy industry schools health care and the railroads were least likely to be favored for privatization

In contrast to public opinion in late 1990 when 44 percent of Poles thought foreign investments would not be helpful and would cause Poshyland to become dependent on foreignshyers just 33 percent voiced this conshycem six months later Instead 57 percent of Poles primarily the young and the well-educated voiced supshyport for foreign businesses investing in Poland Asked which Western counshytries companies were most actively pursuing business opportunities in Poland46 percent said Germany and 20 percent cited the United States Yet when asked which countries were preferred as investors nearly twice as many cited the US (56 percent) as Germany (29 percent) France (26 percent) and Japan (23 percent) were also preferred investors

Given the burdens of economic transhysition in Poland it is hardly surpris-

Market orientations among the Polish public

Source USIA OffICe ofResearch CEE branch

ing that in 1991 economic questions topped the publics list of the most urgent issues facing the country Unshyemployment headed the list of conshycems for women the young workers those with a secondary education and those living in mid-sized cities The cost of living the need for more order in the economy the economic reform process and agricultural issues comshypleted the roster of urgent economic concems In contrast to their conshycerns about economicissues few Poles cited such political issues as political stability development offreedom and democracy or removing former comshymunistsfrom power as being of much urgency In late 1990 public attenshytion had been somewhat more evenly divided between political and ecoshynomic issues The shift in attitude not only suggests the depth of public conshycern about the economic changes ocshycurring in PoIan d but also illustrates the view that most Poles do not beshylieve there are looming threats to Polands new pluralistic system of government

In mid-1991 most Poles expressed a positive attitude toward a market

Volume 2 Number 9 5 October 1991

Transition The World BankCECSE

econ omy 85 percen t believed that an economy only functions if business people make a profit and that this benefits the whole society in the long run More specifically 67 percent thought that under a free market economy some people might have a lot more money than others but in the long run everybody is better off th an under socialism Likewise seven in ten of the Poles surveyed indicated that private property is necessary for economic progress and six in ten thought a democratic society was posshysible only under a market economy Overall the young and the well-edushycated were the most likely to agree with these statements

Even so many Poles showed concern about particular aspects of a market economy More than 59 percent said they believed that people are more exploited when they work for a primiddot vate business than when they work for a state-controlled one A similar percentage believed that a market economy is characterized by coldness in human relationships But only 35 percent thought private property was a major cause of social injustice in society while 75 percent said unemshyployment would be too high in a marshyket economy and a similar number thought that there were too few safeshyguards for weaker members of socishyety Overall the less educated and older Poles were the most likely to express concern about the effects ofa market economy

As these data show the Polish govshyernment clearly faces a problem shy

Polish Perspective on MClrket-Economy Three Categories

bull A Pro-Market Economy Social Costs Negligible group (25 percent of Poles) Tends to believe that thi benefits ofa market economy outweigh thi liabilities Overall this group expresses the most satisfaction with the new state of affairs in Poland is optimistic about economic developshyments and favors radical economic reform Group members tend to be university educated under 30 years of age interested in politics and living in large urban areas

bull All Anti-Market Economy Social Costs Too High group (15 percent) Expresses a negative view of the political and economic situation and of radical economic reform A disproportionately high percentage ofPoles in this group live in rural areas are skilled or unskilled workers are less educated and are not interested in politics

bull A Pro-Market Economy Social Cost Appreciable group (58 percent) Is uncertain whether the benefits ofa market economy outweigh the costs and its evaluation ofpolitical and economic measures falls between the opinions of the othir two groups For example about half expressed satisfaction with thi performance of the national government but most were pessimistic about thi current and future economic situation Only 10 percent voiced support for radical economic reform This group differs demographically very little from thi general population (see figure previous page)

the publics willingness to endure proshylonged economic hardship has diminshyished and a majority remain uncershytain about the benefits of the new economy During his 1991 presidenshytial election campaign President u~ch Walesa promised to accelerate the process of reform This was apparshyently interpreted by many Poles to mean less hardship and more prosshyperity But the bedrock of Walesas economic program remains con tinued austerity Unless more Poles begin to prosper or at least think they will

prosper soon public opinion is likely to turn against the government One group however appears to transcend the public fray over economic reform measures - foreign investors Many Poles welcome foreign investment and prefer American investors over othshyers

Mary McIntosh chiefof the CEE unit Martha Abele MacIver research analyst CEE OffICe ofResearch USIA

Letters to the Editor A Walk or a Rush shy

here is an opinion eloquently argued both inside and outside the Bank that the East EuroshyT

pean countries should learn from Chinas success with gradual economic reform to modify their more radical approaches toward creation of a marshyket economy The presumption is that slow piecemeal reforms and secondshybest policies such as multiple exshychange rates industrial policy trade

October 1991

Comments on IJ Singhs recent article

barriers and continued use of subsishydies will minimize the social costs of transition while advancing refo rm far enough to tap the efficiency gains from a more liberal economic order Both the presumption and the argushyment fail to take account of fundashymental differences between China and Eastern Europe For example GNP per capita the international environshyment the role and performance of

6

agriculture the overall performance of the state sector market size and the long-term costs ofinterventionist policies are vastly different between China on the one hand and Eastern Europe and the Soviet Union on the other All this points up that a Chimiddot nese-style go-slow reform of the sysshytem and policy in Eastern Europe would be a recipe for prolonged stagshynation ifnot economic disaster

Volume 2 Number 9

Transition The World BonkCECSE

First China is at an early stage of development enjoying high growth rates because inter alia its starting base was low and growth is still largely extensive (Le originating mostly from the expansion of factors of production rather than from a pure increase in factor productivity) Sevshyeral decades ago when Eastern Euroshypean economies were similar to the current Chinese economy in terms of economic structure and level of de velshyopment they too achieved high growth rates despite highly centralshyized and autocratic systems Howshyever we know today that a lot of that growth (statistical problems aside) occurred in military and heavy indusshytry thus hardly contributing to the main goal of development a sustainshyable increase in the standard of livshying Nowadays Eastern Europe has mature but grossly Inefficient econoshymies that can be revitalized only through relatively fast restructuring and liberalization ofdomestic and forshyeign activities Slow reform will block change while er1suring a stagnantstashytus QUO

Second Eastern European economies are small and necessarily open econoshymies that havl~ much to gain right now from the exchange of knowledge technology investment and ideas with the EuropElan Community While China can affOld some isolation from the world markets mainly due to its immense size I~asternEurope clearly cannot In addition Eastern Europe is the textbook example of small open economies forced to adjust to permashynent sho(ks It is unlikely that China will face external shocks of similar magnitude in the near future conseshyquently there is much less urgency for a radical change Highly intervenshytionist policies which China is pursushying at this stage would almost cershytainly isolate Eastern Europe from the benefits 0 integration into the European Community

Third contrary to some perceptions the dramatic dEcline in output in Eastshyern Europe OVEr the past two years is systemic and as much the result of long-term problems as of short-term exogenous shc1cks such as the colshylapse of the CMEA and the use of restrictive stabilization programs Just as no stabilization of a

Volume 2 Number 9

hyperinflationary economy is achieved without a fast break on inshyflation sources no structural reform in Eastern Europe can succeed withshyout Quickly arresting the systemic causes of extreme structural imbalshyances and inefficiencies the wrong incentives for workers and managshyers overextension of state ownership and interference in the economy sysshytemic pervasive andarbitrary subsishydization and lack of accountability reward and effort

Fourth in Eastern Europe the perforshymance of state en terprises and banks the cornerstones of an economy is appalling compared to the situation for these institutions in China Eastshyern Europes state enterprises and banks have been undergoing reform and introducing various market crishyteria for more than a decade (for sevshyeral decades in Yugoslavia) but they have failed to bring about substan tial results This is because the governshyments failed to alter fundamentally the structure of ownership and the corresponding microeconomic incenshytives In Yugoslavia frequentinstitushytionalreform and continuous institushytional experimentation were followed by extreme financial indiscipline and the entropy of the system In fact the country grew more rapidly before reshyform Slow reform in Hungary and Poland over the past decade created instability and was accompanied by expansion of the black market economy In Bulgaria for a full year after the overthrow of the Zivkov govshyernment failure to start systemic reshyform contributed to the severe downshyturn of the economy Clearly pieceshymeal reform never managed to reshyverse the continuous decline of the East European economies a decline that became more drastic and obvishyous only in the past two years

Fifth as long as Chinas piecemeal reforms work its government will not want to embark on more radicalreshyform that it cannot easily controL In China peer pressure the Commushynist party influence and family and community ties apparently work as important complements to 01 substishytutes for the standard market incenshytives In Eastern Europe these facshytors effectively dissolved in the tushymult of the disappearance of the poshy

7

litical monopoly while market incenshytives are still to develop with the emerging private sector Given the incentive and institutional gaps the need for privatization in Eastern Eushyrope is mOre urgent than it would be in China for example Although the entry into the market of new private firms is already impressive it cannot alter the character of these economies in the immediate future and thus privatization is the pragmatic imperashytive of the day And the longer it is delayed the clearer it will become that the all-encompassing state secshytor alone cannot pull the economies out of their depression

Finally the international economic environment and the strong integrashytion forces at work in Western Europe clearly favor countries that are firmly committed to radical reform and free market policies Why should Eastern Europe not take advantage of this historic opportunity to get the best of the West and in record time The readiness of the West to provide adshyvice technical expertise and knowshyhow is more critical for Eastern Eushyrope than is a deluge of money at this time short of humanitarian aid and the economieslifeblood of short-term trade credits For their own benefit East European countries need to implement systemic reform particushylarly privatization as quickly as posshysible Waiting will delay the benefits of reform too far into the future while the costs will grow and possibly strangle the current changes

Zeljko Bogetic EM5CO The World Bcmk

Bela Csikos-Nagy

Whatever actually happens in Censhytral and Eastern Europe (CEE) and China is there really only a two-track approach to economic reform Inderji t Singhs excellent article in Transishytion touches on the concerns about countries with a socialist economic pattern

N everthelesslet me look at this probshylem from a different point of view Ido not believe that CEE on the one side

October 1991

Transition The World BonkCECSE

and China on the other can be examshyined at the same level In CEE a World BankjlMF Agendasystem transfonnation is going on whereas in China only the refonn of socialist economic planning is on the agenda In the first case a transforshymation Can be observed - from a socialist economy to a social market system and what happens is actually a re-capitalization process In conshytrast China wants to transfonn its socialist commodity-producing economy into a socialist market sysshytem What actually is happening in China (including the restoration of quasi-private property rights) is simishylar to the Hungarian economic refonn of the early 1980s

The two-track approach certainly exshyists although only in the context of Central and Eastern Europe Investishygating the matter from this aspect the issues debated in the article must be expanded I suggest addressing the following bull privatization vs reprivatization bull popular privatization vs the comshymercial variant bull liberalization and deregulation a hannonized vs a controversial solushytion bull social cost narrow vs widespread interpretation and bull maintaining international solvency vs suspending debt servicing etc

Last but not least as I see it the author was influenced by the overshywhelming view so typical of the peshyriod 1989-90 the time when shock therapy was considered to be an adshyequate remedy for crisis management in post-communist societies This comes to the fore strikingly in the paragraph headed Pricerefonn radishycal vs piecemeal I do not think the actual situation at the end of 1991 is what was expected by policymakers propounding this line in 198990

Bela Csik6smiddotNagy is a prominent economist and president of tlu Hungarian Eronomic Asmiddot sociaticn

Moscow Joke

QueBlion What is the new relationshyship among the pound the dollar and

i the ruble

Anwer A pound of rubles =1 dollar

October 1991

First aid from the Sisters

With the USSR now a special associshyate member of the IMF the Fund can begin immediate and wide-ranging technical assistance IMF experts are already in Moscow providing advice on macroeconomic policies exchange and payments systems tax and blmkshying reform and statistics and Soviet officials will be invited to IMF trainshyingcourses in Washington The stipushylations for the fonner Soviet Unions special association can beextended to individual Soviet republics as well The World Bank signed a technical assistance agreement the USSR and the Republics to be financed from a $30 million trust fund The agreeshyment focuses on assisting developshyment of a social safety net reforming the energy agriculture and housing sectors and other key industries deshyvelopingthe private sector and trainshying officials The Bank will also open an office in Moscow to facilitate the implementation of the agreement

IFC in CEE

According to the International Fishynance Corporations recent annual report the greatest expansion of its investment activity in the 1990s will occur in Central and Eastern Europe Out of an expected $4 billion a year in finanCing the IFC expects to approve up to $350 million annually for the CEE region - a 190 percent increase overthe amount approved in FY1991 Algeria Czechoslovakia Mongolia Namibia Romania and Bulgaria have joined the IFC in the past year raisshying the number of member countries to 142

Financial boost to Nicaragua

The World Bank approved a fast-disshybursing $110 million economic reshycoverycredit to Nicaragua from IDA the Banks concessionary-lending afshyfiliate The credit is providing supshyport to cut public sector employment revitalize the civil service reform the financial sector (provide a new regushylatory body and license four private

8

banks) and privatize vast sectors of the economy (return 350 state-owned businesses to the private sector) The IDA credit also supports the introshyduction of trade tax and regulatory reforms to promote private-sector proshyduction The Inter-American Develshyopment Bank is expected to co-finance the IDA credit with $130 million In addition the IMF recently approved a $557 million standby loan At the same time IDA is mobilizing addishytional concessional aid through its chairmanship of Nicaraguas consulshytative group of aid donors

Romanias health care

Romania will begin overhauling its health-care system control the spread of AIDS and improve family-planshyning services through a project supshyported by a $150 million World Bank loan (see TRANSITION September 1991) The project aims to reverse the worsening health conditions and imshyprove the health-care system It inshycludes improvements to rural healthshycare centers a health-education camshypaign strengthened family-planning programs training for health-care workers and provision of medical supplies for hospitals and other health facilities The loan will finance imshyports of medical supplies including disposable syringes and autoclaves The project will make birth control devices affordable and widely availshyable

Support to Laos

An IDA credit of$40 million will proshymote the Laotian Governments efshyforts to institute a market economy The credit wil1 support public entershyprise reform and privatization efforts to boost government revenues and measures to improve the management of public resources The governments privatization program began in 1991 The Bank will assist with auctioning offsmall public enterprises over the next three years Larger public en tershyprises with 30 or more employees will be sold at the rate of20 to 30 a year

(continued on page 14)

Volume 2 Number 9

0 ---z

Georgll

(1) Clntrlll Mia

Transition The World BankCECSE

Quotation of the Month Ukraine and Byelorus will clearly be the front runshyners in a new economic alliance Commersant on future inter-republic ties

The real economic independence of sovereign republics will in many ways depend on their

place in inter-republic exchanges These contacts will determine regardshyless of whether an economic agreeshyment is conclud~dor not the business relations of enterprises in the new states their balances of payments and ifthe ruble zone comes apart the exchange rates of their national curshyrencies

The combination of two factors - the export possibilities of the breakaway territories and the formal principles of an economic agreement - will deshycide the evolution of economic condishytions in every lregion Computations demonstrate that under any scenario of forging an economic alliance Ukraine and Byelorus will clearly be the front runners while the Central Asian nations will not be able to achieve economic independence

served in the transitional period and commodity exchanges between them may be based on current prices This possibility is linked to the central authorities position through the Yavlinsky program The inertia of inter-republican contacts is also due to the fact that more than a quarter of republican GNP is involved in intershyregional exchanges

Should this forecast come true Russhysia Ukraine Byelorus and Azershybaijan will remain donors (if one also takes into account republican contrishybutions to exports to third countries) Byelorus and Ukraine will then shoulshyder the heaviest donor burden All other regions will have to be subsishydized because of the lopsided distrishybution of centrally-imported resources and the balance of payments deficits in inter-republican trade However Latvia and Lithuania will almost be able to balance their accounts in dealshy

ing with other regions This will also be true of Georgia Armenia and Moldavia if their political situations stabilize and if the raw materials blockade is lifted

Scenario B Changeover to world prices

Most republics see a way out by conshyverting to world prices on exports to otherregionsand by introducing their own currencies as a means of protectshying their economics Should the nashytional balance of payments be divided completely among republics and they adopt separate currencies two opshytions are possible bull Republics will trade with third counshytries independently on the basis of world prices Payments among reshypublics will also be in hard currency but based on existing ruble prices bull Republics will rely on world prices for commerce among themselves

The most economically independent regions includl~ the Russian repubshylic where products supplied by other republics account for only 8 percent of gross consumption Ukraine (12 pershycent) and Kazakhstan and Azerbaijan (some 16 percent each) Only three of these republics report a surplus in inter-republican trade in current doshymestic prices -- Azerbaijan (+23 pershycent) Russia (+3 percent) and Ukraine (+06 percent) Elsewhere supplies from other republics are reshysponsible for 20 to 25 percent of overshyall consumption and exercise much greater influence on local economies

Scenario A With current prices

Although trade agreements among republics will probably be drastically changed in thl~ near future existing economic relations between entershypri ses in various regions may be pre-

Volume 2 Number 9

Possible dynamics of republican currency rates otter transition to hard currency and world prices In inleNepublican settlements

Ukrllnlln

marchlll BIIlIca krona

9 October 1991

-Transition The World BankCECSE

The two options may actually be phases of the same process Yet neishyther of them provides for preserving an integral hard currency-ruble zone It is possible though that in the first case the ruble will retain the status of a yard-stick in inter-repubshylican exchanges

I n the first case republics less depenshydent on imports from third countries and with a larger export potential may be in a more advantageous posishytion Computations show that Russia will suffer the heaviest balance of payments deficit with imports exshyceeding exports by 137 percent of the entire trade turnover including inshyter-regional exchanges This is beshycause products from third countries account for more than halfof all Russhysian imports For comparisons sake the share of import supplies in Ukraine and Byelorus trailing the Russian republic in this respect is twice as small In addition the deficit will to a large extent be due to the cheapness of raw materials exported to other republics

The Central Asian region will end up in an even worse position with the combined balance of payments deficit there equaling -178 percent Ukraine may also suffer a balance of paymen ts deficit of -63 percent due to the high proportion of supplies from other reshypublics in its overall imports Byelorus in contrast will enjoy a surplus of 5 percent as it is overshywhelmingly in the black in inter-reshypublican exchanges Transcaucasian republics will have a surplus of 15 percent for the same reason

The switch to world prices will change things dramatically Russia will be the only republic with a trade surplus (128 percent of the entire turnover) Ukraine and Kazakhstan will be able to slash their deficits but other reshygions will suffer catastrophically Transcaucasian republics will develop balance of paymen ts deficits at a level of -118 percent with Armenia and Georgia the hardest hit The Central sian regions deficit will burgeon to -215 percent The aggregate Baltic deficit will nearly triple to -213 pershycent and the Moldavian deficit will likely swell to -356 percent

No republic will be able to avoid the disastrous effects of such a downturn The changeover will provoke a severe structural crisis in republics around Russia as hundreds of enterprises running on Russian raw material s go broke An unprecedented recession in unemployment may follow with posshysibly up to 40 percent of the workforce in the Baltics losing their jobs

Russia can be expected to achieve a surplus in trade with Georgia quickly within a month-and-a-half after the switch the Baltics in two months the Central Asian region in two-and-ashyhalfmonths and Kazakhstan in threeshyand-a-halfmonths All indications are thatstructural maneuvering will Sl)on give a boost to the Byelorussian and Ukrainian currencies After a brief transitional period their exchange rates may even appreciate against the ruble because the two republics will enjoy a trade surplus with Russia in agricultural products and food

Efficiency Soviet Style ~~

~~ W_~~s~ ~~

~ ~ bullbull From the Souiet weekly Commersant

october 1991 10

Scenario C Transferrable ruble resuscitated

In the volatile situation of price deforshymities and uncertainty about the dishyvision of foreign debt the republics may preserve the Bank for Foreign Economic Activities (Vneshekoshynombank) as the single agency anshyswerable to third countries for the former USSRs state liabilities and to act as the chief manager of governshymentcredits The republics migh t use Vneshekonombank for transferring all account-settling in exportimport activities to republican foreign trade banks Raising prices on fuel power cotton ferrous and non-ferrous metshyals and possibly grain will be a comshypromise whereby raw material-exshyporting regions will not consider their interests infringed upon and raw material importers will not find themshyselves in a critical state Taking their cue from the defunct COMECON reshypublics can sign state contracts among themselves to supply products at prices that will remain stable for stipumiddot lated periods

In this case inter-republican exshychanges under state contracts and direct agreements between entershyprises in different regions can be served by an imaginary currency (a new transferrable ruble) with a stable exchange rate in relation to hard curshyrency The rate most likely will be regulated by an inter-republican agency patterned on COMECONs International Bank for Economic Coshyoperation - effectively a committee consisting of national bank represenshytatives engaged in facilitating intershyrepublican payments Republics may still introduce their own currencies Fluctuations will be determined mostly by the availability of goods in the markets the currency-creation policies of republican banks and the progress of economic reform in the regions Should this scenario materishyalize regions enjoying a surplus in foreign trade will naturally take the dominant positions in the new Intershynational Bank for Economic Cooperashytion

From Will it really work in the Soviet busimiddot ness weekly Commersant The authors Nikita Kirichenko Lyubou Strizhkova and Vera Shirobakoua comprise a research group

Volume 2 Number 9

Transition The Wor1d BankCECSE

Milestones of Transition

In late October Boris Yeltsin anshynounced a program of drastic ecoshynomic reforms for the Russian republic The plan would free prices and remove subsidies by the end of the year privatize large sections of state-owned industry and agriculture and create a more viable currency (Oil products and some consumer staples such as bread are likely to be excluded from the price liberalization) The price move will be preceded by a financial stabilization program deshysigned to mop up some of the bilshylions of eXCESS rubles in circulashytion and cut the former USSRs deficit slash grants to inefficient enterprises cut defense spending stop fundin~~ for about 70 Soviet ministries as of November 1 and end all economic assistance to forshyeign countries Other measures include dealing with newly indeshypendent Soviet republics in hard currency at world prices ending subsidizationjoining oth er repubshylics in a new economic community and providing safety nets for lowshyincome families Yeltsin proposed a new inter-state bank to be creshyated by Russia and the other reshypublics if the latter refrain from issuing their own currencies and agree to a system under which each republics vote would be proshyportionate to its capital If not Russia would form its own state bank and introduce its oVlm curshyrency said Yeltsin addingthathe was ready to head a new governshyment of national unity Inflation has reached a critical level and 55 percent offcimilies were living beshylow the poverty line he stated

The Europnan Bank for Reconshystruction an d Development is conshysidering establishing a new bank to finance trade from Eastern Eushyrope to the Soviet Union EBRD vice-president Ronald Freeman reminded a Paris conference that several East European countries have approached the EBRD for help in expcrtingto the USSR An

EBRD official in London said such a bank could be set up with the help of the World Bank the IMF the OECD and the EC with the EBRD charged with coordinating the new banks acshytivities EBRD President Jacques Attali raised the idea of creating the bank during the World BankllMF Annual Meeting in Bangkok in Octoshyber

Polands president Lech Walesa has hinted that he might appoint former Finance Minister Leszek Balcerowicz as head of the central bank Walesa wants to reorient economic reforms to soften their impact on the population give each Pole stock in privatized state industries intensify job retraining and stimulate local officials to begin auctioning vacant state property in their areas Poland could have as many as 35 million unemployed next year which would be the highest proshyportion of jobless in Europe saidJerzy Eysymont chief of the Polish Planshyning Office If current trends in the Polish economy continue unemployshyment could reach 16 to 18 percent of the workforce

Last year the Soviet Unions budget deficit reached 300 billion rubles or 25 percent of GNP and according to Soviet estimates it will be over 450 billion next year according to the latest figures of the Soviet central statistics office Goskomstat The Soshyviet money supply shot up sharply between June andAugust when up to 20 billion new rubles went into circushylation The state issued an additional 13 billion rubles during September In addition Soviet oil exports are expected to fall to 14 million barrels a day in the first quarter of 1992 half the level of the corresponding period in 1991 Goskomstat has announced that national income the main indishycator of the USSRs economic perforshymance fell 13 percent in the first nine months of 1991 The grain harvest is expected to be down a quarter from lastyears harvest atjust 160 million tons Goskomstat official Igor Pogosov told reporters that a unified financial

and credit policy has effectively broken down and that the repubshylics are pursuing separate and uncoordinated policies

Romanias new prime minister Theodor Stolojan says his top prishyority is to redress the impoverished economy Recent riots cost Romashynias economy almost $3 billion in delayed foreign loans and lost inshyvestment according to Economy Minister Eugen Dijmarescu The cost ofliving has more than tripled in the past 11 months Official figshyures showed that prices soared 2194 percent between October 1990 and October 1991

Germanys five leading economic research institutes report that western Germanys economic growth will slow to 2 percent in 1992 from 35 percent this year but eastern Germanys recovery shywith growth seen at 12 percent in 1992 following a 10 percent conshytraction this year - will expand united Germanys economy by 25 percent in 1992 In their annual economic report the five institutes predicted that the expansion would be uneven however with strong growth in the construction retail and service sectors and continued weakness in heavy industry

Inter-Korean trade has surged in 1991 totaling 124 million dollars in the first eight months asagainst 25 million dollars for the whole of 1990 Currently North Korea is informally seeking participation from South Korea in a possible Speshycial Economic Zone on the border with China and the USSR

The Chinese economy grew 68 pershycent in the first nine months of 1991 compared with the same period last year this makes the rate for the whole year above 6 percent according to Zhang Zhongji spokesman for the State Statistical Bureau The national economy has regained normal growth but some problems and unstable facshy

(continued on page 15)

Volume 2 Number 9 11 October 1991

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

losses d shy_-~o( f r

r r

gt ~ I

~ 07 ~

---

~Jl ~~

lt ~

Ci ~- ~

~

From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

Pro-Market Economyl Pro-Market Economyl Social Costs APIJreClalCle Costs Negligible

Unclassified

Anti-Market Economyl SOCial Costs Too High

Transition The World BankCECSE

Poles Support Market Economy with Caution Opinion poll reveals split society

N early twel years of shock therapy have taken their toll on the Polish publics willingshy

ness to endure economic hardship according to a series of nationwide public opinion polls commissioned by the US Information Agency In early 1990 more than 56 percent of Poles thought that Finance Minister Balcerowiczs radical economic reform program correctly addressed Polands economic woes But public support quickly waned as the adversity ofthe reform process became a daily realshyity By late 1990 only 30 percent favored radical economic reform and by mid-1991 support had dwindled to 17 percent In contrast a solid majority of Poles - 72 percent as of mid-1991 - said they preferred a program of gradual reform [This cershytainly helps to explain the huge abshystention rate - tiQ percent - and the inconclusive results of the recent parshyliamentary election]

However public favor of two key comshyponents of reform - private ownershyship and foreign investment - inshycreased in the six months up to midshy1991 As of late 1990 48 percent of Poles thought most businesses should be owned by the state while 39 pershycent thought they should be privately owned By mid-1991 support for privatization had risen to 45 percent Support for private ownership of bus ishyness was highest among the young (18-29) the university-educated and urbanites NevErtheless Poles still voice less support for privatization if it is thought to affect them personshyally For examplejust three in ten of those who worked for state-owned firms said they wanted their firms to be privatized five in ten said they did not and the rest of those surveyed offered no opinion Those who supshyported privatization were more optishymistic about their long-term economic future and were likely to favorradical reform In terms of support for

privatization of specific industries farms and restaurants were cited the most while heavy industry schools health care and the railroads were least likely to be favored for privatization

In contrast to public opinion in late 1990 when 44 percent of Poles thought foreign investments would not be helpful and would cause Poshyland to become dependent on foreignshyers just 33 percent voiced this conshycem six months later Instead 57 percent of Poles primarily the young and the well-educated voiced supshyport for foreign businesses investing in Poland Asked which Western counshytries companies were most actively pursuing business opportunities in Poland46 percent said Germany and 20 percent cited the United States Yet when asked which countries were preferred as investors nearly twice as many cited the US (56 percent) as Germany (29 percent) France (26 percent) and Japan (23 percent) were also preferred investors

Given the burdens of economic transhysition in Poland it is hardly surpris-

Market orientations among the Polish public

Source USIA OffICe ofResearch CEE branch

ing that in 1991 economic questions topped the publics list of the most urgent issues facing the country Unshyemployment headed the list of conshycems for women the young workers those with a secondary education and those living in mid-sized cities The cost of living the need for more order in the economy the economic reform process and agricultural issues comshypleted the roster of urgent economic concems In contrast to their conshycerns about economicissues few Poles cited such political issues as political stability development offreedom and democracy or removing former comshymunistsfrom power as being of much urgency In late 1990 public attenshytion had been somewhat more evenly divided between political and ecoshynomic issues The shift in attitude not only suggests the depth of public conshycern about the economic changes ocshycurring in PoIan d but also illustrates the view that most Poles do not beshylieve there are looming threats to Polands new pluralistic system of government

In mid-1991 most Poles expressed a positive attitude toward a market

Volume 2 Number 9 5 October 1991

Transition The World BankCECSE

econ omy 85 percen t believed that an economy only functions if business people make a profit and that this benefits the whole society in the long run More specifically 67 percent thought that under a free market economy some people might have a lot more money than others but in the long run everybody is better off th an under socialism Likewise seven in ten of the Poles surveyed indicated that private property is necessary for economic progress and six in ten thought a democratic society was posshysible only under a market economy Overall the young and the well-edushycated were the most likely to agree with these statements

Even so many Poles showed concern about particular aspects of a market economy More than 59 percent said they believed that people are more exploited when they work for a primiddot vate business than when they work for a state-controlled one A similar percentage believed that a market economy is characterized by coldness in human relationships But only 35 percent thought private property was a major cause of social injustice in society while 75 percent said unemshyployment would be too high in a marshyket economy and a similar number thought that there were too few safeshyguards for weaker members of socishyety Overall the less educated and older Poles were the most likely to express concern about the effects ofa market economy

As these data show the Polish govshyernment clearly faces a problem shy

Polish Perspective on MClrket-Economy Three Categories

bull A Pro-Market Economy Social Costs Negligible group (25 percent of Poles) Tends to believe that thi benefits ofa market economy outweigh thi liabilities Overall this group expresses the most satisfaction with the new state of affairs in Poland is optimistic about economic developshyments and favors radical economic reform Group members tend to be university educated under 30 years of age interested in politics and living in large urban areas

bull All Anti-Market Economy Social Costs Too High group (15 percent) Expresses a negative view of the political and economic situation and of radical economic reform A disproportionately high percentage ofPoles in this group live in rural areas are skilled or unskilled workers are less educated and are not interested in politics

bull A Pro-Market Economy Social Cost Appreciable group (58 percent) Is uncertain whether the benefits ofa market economy outweigh the costs and its evaluation ofpolitical and economic measures falls between the opinions of the othir two groups For example about half expressed satisfaction with thi performance of the national government but most were pessimistic about thi current and future economic situation Only 10 percent voiced support for radical economic reform This group differs demographically very little from thi general population (see figure previous page)

the publics willingness to endure proshylonged economic hardship has diminshyished and a majority remain uncershytain about the benefits of the new economy During his 1991 presidenshytial election campaign President u~ch Walesa promised to accelerate the process of reform This was apparshyently interpreted by many Poles to mean less hardship and more prosshyperity But the bedrock of Walesas economic program remains con tinued austerity Unless more Poles begin to prosper or at least think they will

prosper soon public opinion is likely to turn against the government One group however appears to transcend the public fray over economic reform measures - foreign investors Many Poles welcome foreign investment and prefer American investors over othshyers

Mary McIntosh chiefof the CEE unit Martha Abele MacIver research analyst CEE OffICe ofResearch USIA

Letters to the Editor A Walk or a Rush shy

here is an opinion eloquently argued both inside and outside the Bank that the East EuroshyT

pean countries should learn from Chinas success with gradual economic reform to modify their more radical approaches toward creation of a marshyket economy The presumption is that slow piecemeal reforms and secondshybest policies such as multiple exshychange rates industrial policy trade

October 1991

Comments on IJ Singhs recent article

barriers and continued use of subsishydies will minimize the social costs of transition while advancing refo rm far enough to tap the efficiency gains from a more liberal economic order Both the presumption and the argushyment fail to take account of fundashymental differences between China and Eastern Europe For example GNP per capita the international environshyment the role and performance of

6

agriculture the overall performance of the state sector market size and the long-term costs ofinterventionist policies are vastly different between China on the one hand and Eastern Europe and the Soviet Union on the other All this points up that a Chimiddot nese-style go-slow reform of the sysshytem and policy in Eastern Europe would be a recipe for prolonged stagshynation ifnot economic disaster

Volume 2 Number 9

Transition The World BonkCECSE

First China is at an early stage of development enjoying high growth rates because inter alia its starting base was low and growth is still largely extensive (Le originating mostly from the expansion of factors of production rather than from a pure increase in factor productivity) Sevshyeral decades ago when Eastern Euroshypean economies were similar to the current Chinese economy in terms of economic structure and level of de velshyopment they too achieved high growth rates despite highly centralshyized and autocratic systems Howshyever we know today that a lot of that growth (statistical problems aside) occurred in military and heavy indusshytry thus hardly contributing to the main goal of development a sustainshyable increase in the standard of livshying Nowadays Eastern Europe has mature but grossly Inefficient econoshymies that can be revitalized only through relatively fast restructuring and liberalization ofdomestic and forshyeign activities Slow reform will block change while er1suring a stagnantstashytus QUO

Second Eastern European economies are small and necessarily open econoshymies that havl~ much to gain right now from the exchange of knowledge technology investment and ideas with the EuropElan Community While China can affOld some isolation from the world markets mainly due to its immense size I~asternEurope clearly cannot In addition Eastern Europe is the textbook example of small open economies forced to adjust to permashynent sho(ks It is unlikely that China will face external shocks of similar magnitude in the near future conseshyquently there is much less urgency for a radical change Highly intervenshytionist policies which China is pursushying at this stage would almost cershytainly isolate Eastern Europe from the benefits 0 integration into the European Community

Third contrary to some perceptions the dramatic dEcline in output in Eastshyern Europe OVEr the past two years is systemic and as much the result of long-term problems as of short-term exogenous shc1cks such as the colshylapse of the CMEA and the use of restrictive stabilization programs Just as no stabilization of a

Volume 2 Number 9

hyperinflationary economy is achieved without a fast break on inshyflation sources no structural reform in Eastern Europe can succeed withshyout Quickly arresting the systemic causes of extreme structural imbalshyances and inefficiencies the wrong incentives for workers and managshyers overextension of state ownership and interference in the economy sysshytemic pervasive andarbitrary subsishydization and lack of accountability reward and effort

Fourth in Eastern Europe the perforshymance of state en terprises and banks the cornerstones of an economy is appalling compared to the situation for these institutions in China Eastshyern Europes state enterprises and banks have been undergoing reform and introducing various market crishyteria for more than a decade (for sevshyeral decades in Yugoslavia) but they have failed to bring about substan tial results This is because the governshyments failed to alter fundamentally the structure of ownership and the corresponding microeconomic incenshytives In Yugoslavia frequentinstitushytionalreform and continuous institushytional experimentation were followed by extreme financial indiscipline and the entropy of the system In fact the country grew more rapidly before reshyform Slow reform in Hungary and Poland over the past decade created instability and was accompanied by expansion of the black market economy In Bulgaria for a full year after the overthrow of the Zivkov govshyernment failure to start systemic reshyform contributed to the severe downshyturn of the economy Clearly pieceshymeal reform never managed to reshyverse the continuous decline of the East European economies a decline that became more drastic and obvishyous only in the past two years

Fifth as long as Chinas piecemeal reforms work its government will not want to embark on more radicalreshyform that it cannot easily controL In China peer pressure the Commushynist party influence and family and community ties apparently work as important complements to 01 substishytutes for the standard market incenshytives In Eastern Europe these facshytors effectively dissolved in the tushymult of the disappearance of the poshy

7

litical monopoly while market incenshytives are still to develop with the emerging private sector Given the incentive and institutional gaps the need for privatization in Eastern Eushyrope is mOre urgent than it would be in China for example Although the entry into the market of new private firms is already impressive it cannot alter the character of these economies in the immediate future and thus privatization is the pragmatic imperashytive of the day And the longer it is delayed the clearer it will become that the all-encompassing state secshytor alone cannot pull the economies out of their depression

Finally the international economic environment and the strong integrashytion forces at work in Western Europe clearly favor countries that are firmly committed to radical reform and free market policies Why should Eastern Europe not take advantage of this historic opportunity to get the best of the West and in record time The readiness of the West to provide adshyvice technical expertise and knowshyhow is more critical for Eastern Eushyrope than is a deluge of money at this time short of humanitarian aid and the economieslifeblood of short-term trade credits For their own benefit East European countries need to implement systemic reform particushylarly privatization as quickly as posshysible Waiting will delay the benefits of reform too far into the future while the costs will grow and possibly strangle the current changes

Zeljko Bogetic EM5CO The World Bcmk

Bela Csikos-Nagy

Whatever actually happens in Censhytral and Eastern Europe (CEE) and China is there really only a two-track approach to economic reform Inderji t Singhs excellent article in Transishytion touches on the concerns about countries with a socialist economic pattern

N everthelesslet me look at this probshylem from a different point of view Ido not believe that CEE on the one side

October 1991

Transition The World BonkCECSE

and China on the other can be examshyined at the same level In CEE a World BankjlMF Agendasystem transfonnation is going on whereas in China only the refonn of socialist economic planning is on the agenda In the first case a transforshymation Can be observed - from a socialist economy to a social market system and what happens is actually a re-capitalization process In conshytrast China wants to transfonn its socialist commodity-producing economy into a socialist market sysshytem What actually is happening in China (including the restoration of quasi-private property rights) is simishylar to the Hungarian economic refonn of the early 1980s

The two-track approach certainly exshyists although only in the context of Central and Eastern Europe Investishygating the matter from this aspect the issues debated in the article must be expanded I suggest addressing the following bull privatization vs reprivatization bull popular privatization vs the comshymercial variant bull liberalization and deregulation a hannonized vs a controversial solushytion bull social cost narrow vs widespread interpretation and bull maintaining international solvency vs suspending debt servicing etc

Last but not least as I see it the author was influenced by the overshywhelming view so typical of the peshyriod 1989-90 the time when shock therapy was considered to be an adshyequate remedy for crisis management in post-communist societies This comes to the fore strikingly in the paragraph headed Pricerefonn radishycal vs piecemeal I do not think the actual situation at the end of 1991 is what was expected by policymakers propounding this line in 198990

Bela Csik6smiddotNagy is a prominent economist and president of tlu Hungarian Eronomic Asmiddot sociaticn

Moscow Joke

QueBlion What is the new relationshyship among the pound the dollar and

i the ruble

Anwer A pound of rubles =1 dollar

October 1991

First aid from the Sisters

With the USSR now a special associshyate member of the IMF the Fund can begin immediate and wide-ranging technical assistance IMF experts are already in Moscow providing advice on macroeconomic policies exchange and payments systems tax and blmkshying reform and statistics and Soviet officials will be invited to IMF trainshyingcourses in Washington The stipushylations for the fonner Soviet Unions special association can beextended to individual Soviet republics as well The World Bank signed a technical assistance agreement the USSR and the Republics to be financed from a $30 million trust fund The agreeshyment focuses on assisting developshyment of a social safety net reforming the energy agriculture and housing sectors and other key industries deshyvelopingthe private sector and trainshying officials The Bank will also open an office in Moscow to facilitate the implementation of the agreement

IFC in CEE

According to the International Fishynance Corporations recent annual report the greatest expansion of its investment activity in the 1990s will occur in Central and Eastern Europe Out of an expected $4 billion a year in finanCing the IFC expects to approve up to $350 million annually for the CEE region - a 190 percent increase overthe amount approved in FY1991 Algeria Czechoslovakia Mongolia Namibia Romania and Bulgaria have joined the IFC in the past year raisshying the number of member countries to 142

Financial boost to Nicaragua

The World Bank approved a fast-disshybursing $110 million economic reshycoverycredit to Nicaragua from IDA the Banks concessionary-lending afshyfiliate The credit is providing supshyport to cut public sector employment revitalize the civil service reform the financial sector (provide a new regushylatory body and license four private

8

banks) and privatize vast sectors of the economy (return 350 state-owned businesses to the private sector) The IDA credit also supports the introshyduction of trade tax and regulatory reforms to promote private-sector proshyduction The Inter-American Develshyopment Bank is expected to co-finance the IDA credit with $130 million In addition the IMF recently approved a $557 million standby loan At the same time IDA is mobilizing addishytional concessional aid through its chairmanship of Nicaraguas consulshytative group of aid donors

Romanias health care

Romania will begin overhauling its health-care system control the spread of AIDS and improve family-planshyning services through a project supshyported by a $150 million World Bank loan (see TRANSITION September 1991) The project aims to reverse the worsening health conditions and imshyprove the health-care system It inshycludes improvements to rural healthshycare centers a health-education camshypaign strengthened family-planning programs training for health-care workers and provision of medical supplies for hospitals and other health facilities The loan will finance imshyports of medical supplies including disposable syringes and autoclaves The project will make birth control devices affordable and widely availshyable

Support to Laos

An IDA credit of$40 million will proshymote the Laotian Governments efshyforts to institute a market economy The credit wil1 support public entershyprise reform and privatization efforts to boost government revenues and measures to improve the management of public resources The governments privatization program began in 1991 The Bank will assist with auctioning offsmall public enterprises over the next three years Larger public en tershyprises with 30 or more employees will be sold at the rate of20 to 30 a year

(continued on page 14)

Volume 2 Number 9

0 ---z

Georgll

(1) Clntrlll Mia

Transition The World BankCECSE

Quotation of the Month Ukraine and Byelorus will clearly be the front runshyners in a new economic alliance Commersant on future inter-republic ties

The real economic independence of sovereign republics will in many ways depend on their

place in inter-republic exchanges These contacts will determine regardshyless of whether an economic agreeshyment is conclud~dor not the business relations of enterprises in the new states their balances of payments and ifthe ruble zone comes apart the exchange rates of their national curshyrencies

The combination of two factors - the export possibilities of the breakaway territories and the formal principles of an economic agreement - will deshycide the evolution of economic condishytions in every lregion Computations demonstrate that under any scenario of forging an economic alliance Ukraine and Byelorus will clearly be the front runners while the Central Asian nations will not be able to achieve economic independence

served in the transitional period and commodity exchanges between them may be based on current prices This possibility is linked to the central authorities position through the Yavlinsky program The inertia of inter-republican contacts is also due to the fact that more than a quarter of republican GNP is involved in intershyregional exchanges

Should this forecast come true Russhysia Ukraine Byelorus and Azershybaijan will remain donors (if one also takes into account republican contrishybutions to exports to third countries) Byelorus and Ukraine will then shoulshyder the heaviest donor burden All other regions will have to be subsishydized because of the lopsided distrishybution of centrally-imported resources and the balance of payments deficits in inter-republican trade However Latvia and Lithuania will almost be able to balance their accounts in dealshy

ing with other regions This will also be true of Georgia Armenia and Moldavia if their political situations stabilize and if the raw materials blockade is lifted

Scenario B Changeover to world prices

Most republics see a way out by conshyverting to world prices on exports to otherregionsand by introducing their own currencies as a means of protectshying their economics Should the nashytional balance of payments be divided completely among republics and they adopt separate currencies two opshytions are possible bull Republics will trade with third counshytries independently on the basis of world prices Payments among reshypublics will also be in hard currency but based on existing ruble prices bull Republics will rely on world prices for commerce among themselves

The most economically independent regions includl~ the Russian repubshylic where products supplied by other republics account for only 8 percent of gross consumption Ukraine (12 pershycent) and Kazakhstan and Azerbaijan (some 16 percent each) Only three of these republics report a surplus in inter-republican trade in current doshymestic prices -- Azerbaijan (+23 pershycent) Russia (+3 percent) and Ukraine (+06 percent) Elsewhere supplies from other republics are reshysponsible for 20 to 25 percent of overshyall consumption and exercise much greater influence on local economies

Scenario A With current prices

Although trade agreements among republics will probably be drastically changed in thl~ near future existing economic relations between entershypri ses in various regions may be pre-

Volume 2 Number 9

Possible dynamics of republican currency rates otter transition to hard currency and world prices In inleNepublican settlements

Ukrllnlln

marchlll BIIlIca krona

9 October 1991

-Transition The World BankCECSE

The two options may actually be phases of the same process Yet neishyther of them provides for preserving an integral hard currency-ruble zone It is possible though that in the first case the ruble will retain the status of a yard-stick in inter-repubshylican exchanges

I n the first case republics less depenshydent on imports from third countries and with a larger export potential may be in a more advantageous posishytion Computations show that Russia will suffer the heaviest balance of payments deficit with imports exshyceeding exports by 137 percent of the entire trade turnover including inshyter-regional exchanges This is beshycause products from third countries account for more than halfof all Russhysian imports For comparisons sake the share of import supplies in Ukraine and Byelorus trailing the Russian republic in this respect is twice as small In addition the deficit will to a large extent be due to the cheapness of raw materials exported to other republics

The Central Asian region will end up in an even worse position with the combined balance of payments deficit there equaling -178 percent Ukraine may also suffer a balance of paymen ts deficit of -63 percent due to the high proportion of supplies from other reshypublics in its overall imports Byelorus in contrast will enjoy a surplus of 5 percent as it is overshywhelmingly in the black in inter-reshypublican exchanges Transcaucasian republics will have a surplus of 15 percent for the same reason

The switch to world prices will change things dramatically Russia will be the only republic with a trade surplus (128 percent of the entire turnover) Ukraine and Kazakhstan will be able to slash their deficits but other reshygions will suffer catastrophically Transcaucasian republics will develop balance of paymen ts deficits at a level of -118 percent with Armenia and Georgia the hardest hit The Central sian regions deficit will burgeon to -215 percent The aggregate Baltic deficit will nearly triple to -213 pershycent and the Moldavian deficit will likely swell to -356 percent

No republic will be able to avoid the disastrous effects of such a downturn The changeover will provoke a severe structural crisis in republics around Russia as hundreds of enterprises running on Russian raw material s go broke An unprecedented recession in unemployment may follow with posshysibly up to 40 percent of the workforce in the Baltics losing their jobs

Russia can be expected to achieve a surplus in trade with Georgia quickly within a month-and-a-half after the switch the Baltics in two months the Central Asian region in two-and-ashyhalfmonths and Kazakhstan in threeshyand-a-halfmonths All indications are thatstructural maneuvering will Sl)on give a boost to the Byelorussian and Ukrainian currencies After a brief transitional period their exchange rates may even appreciate against the ruble because the two republics will enjoy a trade surplus with Russia in agricultural products and food

Efficiency Soviet Style ~~

~~ W_~~s~ ~~

~ ~ bullbull From the Souiet weekly Commersant

october 1991 10

Scenario C Transferrable ruble resuscitated

In the volatile situation of price deforshymities and uncertainty about the dishyvision of foreign debt the republics may preserve the Bank for Foreign Economic Activities (Vneshekoshynombank) as the single agency anshyswerable to third countries for the former USSRs state liabilities and to act as the chief manager of governshymentcredits The republics migh t use Vneshekonombank for transferring all account-settling in exportimport activities to republican foreign trade banks Raising prices on fuel power cotton ferrous and non-ferrous metshyals and possibly grain will be a comshypromise whereby raw material-exshyporting regions will not consider their interests infringed upon and raw material importers will not find themshyselves in a critical state Taking their cue from the defunct COMECON reshypublics can sign state contracts among themselves to supply products at prices that will remain stable for stipumiddot lated periods

In this case inter-republican exshychanges under state contracts and direct agreements between entershyprises in different regions can be served by an imaginary currency (a new transferrable ruble) with a stable exchange rate in relation to hard curshyrency The rate most likely will be regulated by an inter-republican agency patterned on COMECONs International Bank for Economic Coshyoperation - effectively a committee consisting of national bank represenshytatives engaged in facilitating intershyrepublican payments Republics may still introduce their own currencies Fluctuations will be determined mostly by the availability of goods in the markets the currency-creation policies of republican banks and the progress of economic reform in the regions Should this scenario materishyalize regions enjoying a surplus in foreign trade will naturally take the dominant positions in the new Intershynational Bank for Economic Cooperashytion

From Will it really work in the Soviet busimiddot ness weekly Commersant The authors Nikita Kirichenko Lyubou Strizhkova and Vera Shirobakoua comprise a research group

Volume 2 Number 9

Transition The Wor1d BankCECSE

Milestones of Transition

In late October Boris Yeltsin anshynounced a program of drastic ecoshynomic reforms for the Russian republic The plan would free prices and remove subsidies by the end of the year privatize large sections of state-owned industry and agriculture and create a more viable currency (Oil products and some consumer staples such as bread are likely to be excluded from the price liberalization) The price move will be preceded by a financial stabilization program deshysigned to mop up some of the bilshylions of eXCESS rubles in circulashytion and cut the former USSRs deficit slash grants to inefficient enterprises cut defense spending stop fundin~~ for about 70 Soviet ministries as of November 1 and end all economic assistance to forshyeign countries Other measures include dealing with newly indeshypendent Soviet republics in hard currency at world prices ending subsidizationjoining oth er repubshylics in a new economic community and providing safety nets for lowshyincome families Yeltsin proposed a new inter-state bank to be creshyated by Russia and the other reshypublics if the latter refrain from issuing their own currencies and agree to a system under which each republics vote would be proshyportionate to its capital If not Russia would form its own state bank and introduce its oVlm curshyrency said Yeltsin addingthathe was ready to head a new governshyment of national unity Inflation has reached a critical level and 55 percent offcimilies were living beshylow the poverty line he stated

The Europnan Bank for Reconshystruction an d Development is conshysidering establishing a new bank to finance trade from Eastern Eushyrope to the Soviet Union EBRD vice-president Ronald Freeman reminded a Paris conference that several East European countries have approached the EBRD for help in expcrtingto the USSR An

EBRD official in London said such a bank could be set up with the help of the World Bank the IMF the OECD and the EC with the EBRD charged with coordinating the new banks acshytivities EBRD President Jacques Attali raised the idea of creating the bank during the World BankllMF Annual Meeting in Bangkok in Octoshyber

Polands president Lech Walesa has hinted that he might appoint former Finance Minister Leszek Balcerowicz as head of the central bank Walesa wants to reorient economic reforms to soften their impact on the population give each Pole stock in privatized state industries intensify job retraining and stimulate local officials to begin auctioning vacant state property in their areas Poland could have as many as 35 million unemployed next year which would be the highest proshyportion of jobless in Europe saidJerzy Eysymont chief of the Polish Planshyning Office If current trends in the Polish economy continue unemployshyment could reach 16 to 18 percent of the workforce

Last year the Soviet Unions budget deficit reached 300 billion rubles or 25 percent of GNP and according to Soviet estimates it will be over 450 billion next year according to the latest figures of the Soviet central statistics office Goskomstat The Soshyviet money supply shot up sharply between June andAugust when up to 20 billion new rubles went into circushylation The state issued an additional 13 billion rubles during September In addition Soviet oil exports are expected to fall to 14 million barrels a day in the first quarter of 1992 half the level of the corresponding period in 1991 Goskomstat has announced that national income the main indishycator of the USSRs economic perforshymance fell 13 percent in the first nine months of 1991 The grain harvest is expected to be down a quarter from lastyears harvest atjust 160 million tons Goskomstat official Igor Pogosov told reporters that a unified financial

and credit policy has effectively broken down and that the repubshylics are pursuing separate and uncoordinated policies

Romanias new prime minister Theodor Stolojan says his top prishyority is to redress the impoverished economy Recent riots cost Romashynias economy almost $3 billion in delayed foreign loans and lost inshyvestment according to Economy Minister Eugen Dijmarescu The cost ofliving has more than tripled in the past 11 months Official figshyures showed that prices soared 2194 percent between October 1990 and October 1991

Germanys five leading economic research institutes report that western Germanys economic growth will slow to 2 percent in 1992 from 35 percent this year but eastern Germanys recovery shywith growth seen at 12 percent in 1992 following a 10 percent conshytraction this year - will expand united Germanys economy by 25 percent in 1992 In their annual economic report the five institutes predicted that the expansion would be uneven however with strong growth in the construction retail and service sectors and continued weakness in heavy industry

Inter-Korean trade has surged in 1991 totaling 124 million dollars in the first eight months asagainst 25 million dollars for the whole of 1990 Currently North Korea is informally seeking participation from South Korea in a possible Speshycial Economic Zone on the border with China and the USSR

The Chinese economy grew 68 pershycent in the first nine months of 1991 compared with the same period last year this makes the rate for the whole year above 6 percent according to Zhang Zhongji spokesman for the State Statistical Bureau The national economy has regained normal growth but some problems and unstable facshy

(continued on page 15)

Volume 2 Number 9 11 October 1991

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

losses d shy_-~o( f r

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~

From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

Transition The World BankCECSE

econ omy 85 percen t believed that an economy only functions if business people make a profit and that this benefits the whole society in the long run More specifically 67 percent thought that under a free market economy some people might have a lot more money than others but in the long run everybody is better off th an under socialism Likewise seven in ten of the Poles surveyed indicated that private property is necessary for economic progress and six in ten thought a democratic society was posshysible only under a market economy Overall the young and the well-edushycated were the most likely to agree with these statements

Even so many Poles showed concern about particular aspects of a market economy More than 59 percent said they believed that people are more exploited when they work for a primiddot vate business than when they work for a state-controlled one A similar percentage believed that a market economy is characterized by coldness in human relationships But only 35 percent thought private property was a major cause of social injustice in society while 75 percent said unemshyployment would be too high in a marshyket economy and a similar number thought that there were too few safeshyguards for weaker members of socishyety Overall the less educated and older Poles were the most likely to express concern about the effects ofa market economy

As these data show the Polish govshyernment clearly faces a problem shy

Polish Perspective on MClrket-Economy Three Categories

bull A Pro-Market Economy Social Costs Negligible group (25 percent of Poles) Tends to believe that thi benefits ofa market economy outweigh thi liabilities Overall this group expresses the most satisfaction with the new state of affairs in Poland is optimistic about economic developshyments and favors radical economic reform Group members tend to be university educated under 30 years of age interested in politics and living in large urban areas

bull All Anti-Market Economy Social Costs Too High group (15 percent) Expresses a negative view of the political and economic situation and of radical economic reform A disproportionately high percentage ofPoles in this group live in rural areas are skilled or unskilled workers are less educated and are not interested in politics

bull A Pro-Market Economy Social Cost Appreciable group (58 percent) Is uncertain whether the benefits ofa market economy outweigh the costs and its evaluation ofpolitical and economic measures falls between the opinions of the othir two groups For example about half expressed satisfaction with thi performance of the national government but most were pessimistic about thi current and future economic situation Only 10 percent voiced support for radical economic reform This group differs demographically very little from thi general population (see figure previous page)

the publics willingness to endure proshylonged economic hardship has diminshyished and a majority remain uncershytain about the benefits of the new economy During his 1991 presidenshytial election campaign President u~ch Walesa promised to accelerate the process of reform This was apparshyently interpreted by many Poles to mean less hardship and more prosshyperity But the bedrock of Walesas economic program remains con tinued austerity Unless more Poles begin to prosper or at least think they will

prosper soon public opinion is likely to turn against the government One group however appears to transcend the public fray over economic reform measures - foreign investors Many Poles welcome foreign investment and prefer American investors over othshyers

Mary McIntosh chiefof the CEE unit Martha Abele MacIver research analyst CEE OffICe ofResearch USIA

Letters to the Editor A Walk or a Rush shy

here is an opinion eloquently argued both inside and outside the Bank that the East EuroshyT

pean countries should learn from Chinas success with gradual economic reform to modify their more radical approaches toward creation of a marshyket economy The presumption is that slow piecemeal reforms and secondshybest policies such as multiple exshychange rates industrial policy trade

October 1991

Comments on IJ Singhs recent article

barriers and continued use of subsishydies will minimize the social costs of transition while advancing refo rm far enough to tap the efficiency gains from a more liberal economic order Both the presumption and the argushyment fail to take account of fundashymental differences between China and Eastern Europe For example GNP per capita the international environshyment the role and performance of

6

agriculture the overall performance of the state sector market size and the long-term costs ofinterventionist policies are vastly different between China on the one hand and Eastern Europe and the Soviet Union on the other All this points up that a Chimiddot nese-style go-slow reform of the sysshytem and policy in Eastern Europe would be a recipe for prolonged stagshynation ifnot economic disaster

Volume 2 Number 9

Transition The World BonkCECSE

First China is at an early stage of development enjoying high growth rates because inter alia its starting base was low and growth is still largely extensive (Le originating mostly from the expansion of factors of production rather than from a pure increase in factor productivity) Sevshyeral decades ago when Eastern Euroshypean economies were similar to the current Chinese economy in terms of economic structure and level of de velshyopment they too achieved high growth rates despite highly centralshyized and autocratic systems Howshyever we know today that a lot of that growth (statistical problems aside) occurred in military and heavy indusshytry thus hardly contributing to the main goal of development a sustainshyable increase in the standard of livshying Nowadays Eastern Europe has mature but grossly Inefficient econoshymies that can be revitalized only through relatively fast restructuring and liberalization ofdomestic and forshyeign activities Slow reform will block change while er1suring a stagnantstashytus QUO

Second Eastern European economies are small and necessarily open econoshymies that havl~ much to gain right now from the exchange of knowledge technology investment and ideas with the EuropElan Community While China can affOld some isolation from the world markets mainly due to its immense size I~asternEurope clearly cannot In addition Eastern Europe is the textbook example of small open economies forced to adjust to permashynent sho(ks It is unlikely that China will face external shocks of similar magnitude in the near future conseshyquently there is much less urgency for a radical change Highly intervenshytionist policies which China is pursushying at this stage would almost cershytainly isolate Eastern Europe from the benefits 0 integration into the European Community

Third contrary to some perceptions the dramatic dEcline in output in Eastshyern Europe OVEr the past two years is systemic and as much the result of long-term problems as of short-term exogenous shc1cks such as the colshylapse of the CMEA and the use of restrictive stabilization programs Just as no stabilization of a

Volume 2 Number 9

hyperinflationary economy is achieved without a fast break on inshyflation sources no structural reform in Eastern Europe can succeed withshyout Quickly arresting the systemic causes of extreme structural imbalshyances and inefficiencies the wrong incentives for workers and managshyers overextension of state ownership and interference in the economy sysshytemic pervasive andarbitrary subsishydization and lack of accountability reward and effort

Fourth in Eastern Europe the perforshymance of state en terprises and banks the cornerstones of an economy is appalling compared to the situation for these institutions in China Eastshyern Europes state enterprises and banks have been undergoing reform and introducing various market crishyteria for more than a decade (for sevshyeral decades in Yugoslavia) but they have failed to bring about substan tial results This is because the governshyments failed to alter fundamentally the structure of ownership and the corresponding microeconomic incenshytives In Yugoslavia frequentinstitushytionalreform and continuous institushytional experimentation were followed by extreme financial indiscipline and the entropy of the system In fact the country grew more rapidly before reshyform Slow reform in Hungary and Poland over the past decade created instability and was accompanied by expansion of the black market economy In Bulgaria for a full year after the overthrow of the Zivkov govshyernment failure to start systemic reshyform contributed to the severe downshyturn of the economy Clearly pieceshymeal reform never managed to reshyverse the continuous decline of the East European economies a decline that became more drastic and obvishyous only in the past two years

Fifth as long as Chinas piecemeal reforms work its government will not want to embark on more radicalreshyform that it cannot easily controL In China peer pressure the Commushynist party influence and family and community ties apparently work as important complements to 01 substishytutes for the standard market incenshytives In Eastern Europe these facshytors effectively dissolved in the tushymult of the disappearance of the poshy

7

litical monopoly while market incenshytives are still to develop with the emerging private sector Given the incentive and institutional gaps the need for privatization in Eastern Eushyrope is mOre urgent than it would be in China for example Although the entry into the market of new private firms is already impressive it cannot alter the character of these economies in the immediate future and thus privatization is the pragmatic imperashytive of the day And the longer it is delayed the clearer it will become that the all-encompassing state secshytor alone cannot pull the economies out of their depression

Finally the international economic environment and the strong integrashytion forces at work in Western Europe clearly favor countries that are firmly committed to radical reform and free market policies Why should Eastern Europe not take advantage of this historic opportunity to get the best of the West and in record time The readiness of the West to provide adshyvice technical expertise and knowshyhow is more critical for Eastern Eushyrope than is a deluge of money at this time short of humanitarian aid and the economieslifeblood of short-term trade credits For their own benefit East European countries need to implement systemic reform particushylarly privatization as quickly as posshysible Waiting will delay the benefits of reform too far into the future while the costs will grow and possibly strangle the current changes

Zeljko Bogetic EM5CO The World Bcmk

Bela Csikos-Nagy

Whatever actually happens in Censhytral and Eastern Europe (CEE) and China is there really only a two-track approach to economic reform Inderji t Singhs excellent article in Transishytion touches on the concerns about countries with a socialist economic pattern

N everthelesslet me look at this probshylem from a different point of view Ido not believe that CEE on the one side

October 1991

Transition The World BonkCECSE

and China on the other can be examshyined at the same level In CEE a World BankjlMF Agendasystem transfonnation is going on whereas in China only the refonn of socialist economic planning is on the agenda In the first case a transforshymation Can be observed - from a socialist economy to a social market system and what happens is actually a re-capitalization process In conshytrast China wants to transfonn its socialist commodity-producing economy into a socialist market sysshytem What actually is happening in China (including the restoration of quasi-private property rights) is simishylar to the Hungarian economic refonn of the early 1980s

The two-track approach certainly exshyists although only in the context of Central and Eastern Europe Investishygating the matter from this aspect the issues debated in the article must be expanded I suggest addressing the following bull privatization vs reprivatization bull popular privatization vs the comshymercial variant bull liberalization and deregulation a hannonized vs a controversial solushytion bull social cost narrow vs widespread interpretation and bull maintaining international solvency vs suspending debt servicing etc

Last but not least as I see it the author was influenced by the overshywhelming view so typical of the peshyriod 1989-90 the time when shock therapy was considered to be an adshyequate remedy for crisis management in post-communist societies This comes to the fore strikingly in the paragraph headed Pricerefonn radishycal vs piecemeal I do not think the actual situation at the end of 1991 is what was expected by policymakers propounding this line in 198990

Bela Csik6smiddotNagy is a prominent economist and president of tlu Hungarian Eronomic Asmiddot sociaticn

Moscow Joke

QueBlion What is the new relationshyship among the pound the dollar and

i the ruble

Anwer A pound of rubles =1 dollar

October 1991

First aid from the Sisters

With the USSR now a special associshyate member of the IMF the Fund can begin immediate and wide-ranging technical assistance IMF experts are already in Moscow providing advice on macroeconomic policies exchange and payments systems tax and blmkshying reform and statistics and Soviet officials will be invited to IMF trainshyingcourses in Washington The stipushylations for the fonner Soviet Unions special association can beextended to individual Soviet republics as well The World Bank signed a technical assistance agreement the USSR and the Republics to be financed from a $30 million trust fund The agreeshyment focuses on assisting developshyment of a social safety net reforming the energy agriculture and housing sectors and other key industries deshyvelopingthe private sector and trainshying officials The Bank will also open an office in Moscow to facilitate the implementation of the agreement

IFC in CEE

According to the International Fishynance Corporations recent annual report the greatest expansion of its investment activity in the 1990s will occur in Central and Eastern Europe Out of an expected $4 billion a year in finanCing the IFC expects to approve up to $350 million annually for the CEE region - a 190 percent increase overthe amount approved in FY1991 Algeria Czechoslovakia Mongolia Namibia Romania and Bulgaria have joined the IFC in the past year raisshying the number of member countries to 142

Financial boost to Nicaragua

The World Bank approved a fast-disshybursing $110 million economic reshycoverycredit to Nicaragua from IDA the Banks concessionary-lending afshyfiliate The credit is providing supshyport to cut public sector employment revitalize the civil service reform the financial sector (provide a new regushylatory body and license four private

8

banks) and privatize vast sectors of the economy (return 350 state-owned businesses to the private sector) The IDA credit also supports the introshyduction of trade tax and regulatory reforms to promote private-sector proshyduction The Inter-American Develshyopment Bank is expected to co-finance the IDA credit with $130 million In addition the IMF recently approved a $557 million standby loan At the same time IDA is mobilizing addishytional concessional aid through its chairmanship of Nicaraguas consulshytative group of aid donors

Romanias health care

Romania will begin overhauling its health-care system control the spread of AIDS and improve family-planshyning services through a project supshyported by a $150 million World Bank loan (see TRANSITION September 1991) The project aims to reverse the worsening health conditions and imshyprove the health-care system It inshycludes improvements to rural healthshycare centers a health-education camshypaign strengthened family-planning programs training for health-care workers and provision of medical supplies for hospitals and other health facilities The loan will finance imshyports of medical supplies including disposable syringes and autoclaves The project will make birth control devices affordable and widely availshyable

Support to Laos

An IDA credit of$40 million will proshymote the Laotian Governments efshyforts to institute a market economy The credit wil1 support public entershyprise reform and privatization efforts to boost government revenues and measures to improve the management of public resources The governments privatization program began in 1991 The Bank will assist with auctioning offsmall public enterprises over the next three years Larger public en tershyprises with 30 or more employees will be sold at the rate of20 to 30 a year

(continued on page 14)

Volume 2 Number 9

0 ---z

Georgll

(1) Clntrlll Mia

Transition The World BankCECSE

Quotation of the Month Ukraine and Byelorus will clearly be the front runshyners in a new economic alliance Commersant on future inter-republic ties

The real economic independence of sovereign republics will in many ways depend on their

place in inter-republic exchanges These contacts will determine regardshyless of whether an economic agreeshyment is conclud~dor not the business relations of enterprises in the new states their balances of payments and ifthe ruble zone comes apart the exchange rates of their national curshyrencies

The combination of two factors - the export possibilities of the breakaway territories and the formal principles of an economic agreement - will deshycide the evolution of economic condishytions in every lregion Computations demonstrate that under any scenario of forging an economic alliance Ukraine and Byelorus will clearly be the front runners while the Central Asian nations will not be able to achieve economic independence

served in the transitional period and commodity exchanges between them may be based on current prices This possibility is linked to the central authorities position through the Yavlinsky program The inertia of inter-republican contacts is also due to the fact that more than a quarter of republican GNP is involved in intershyregional exchanges

Should this forecast come true Russhysia Ukraine Byelorus and Azershybaijan will remain donors (if one also takes into account republican contrishybutions to exports to third countries) Byelorus and Ukraine will then shoulshyder the heaviest donor burden All other regions will have to be subsishydized because of the lopsided distrishybution of centrally-imported resources and the balance of payments deficits in inter-republican trade However Latvia and Lithuania will almost be able to balance their accounts in dealshy

ing with other regions This will also be true of Georgia Armenia and Moldavia if their political situations stabilize and if the raw materials blockade is lifted

Scenario B Changeover to world prices

Most republics see a way out by conshyverting to world prices on exports to otherregionsand by introducing their own currencies as a means of protectshying their economics Should the nashytional balance of payments be divided completely among republics and they adopt separate currencies two opshytions are possible bull Republics will trade with third counshytries independently on the basis of world prices Payments among reshypublics will also be in hard currency but based on existing ruble prices bull Republics will rely on world prices for commerce among themselves

The most economically independent regions includl~ the Russian repubshylic where products supplied by other republics account for only 8 percent of gross consumption Ukraine (12 pershycent) and Kazakhstan and Azerbaijan (some 16 percent each) Only three of these republics report a surplus in inter-republican trade in current doshymestic prices -- Azerbaijan (+23 pershycent) Russia (+3 percent) and Ukraine (+06 percent) Elsewhere supplies from other republics are reshysponsible for 20 to 25 percent of overshyall consumption and exercise much greater influence on local economies

Scenario A With current prices

Although trade agreements among republics will probably be drastically changed in thl~ near future existing economic relations between entershypri ses in various regions may be pre-

Volume 2 Number 9

Possible dynamics of republican currency rates otter transition to hard currency and world prices In inleNepublican settlements

Ukrllnlln

marchlll BIIlIca krona

9 October 1991

-Transition The World BankCECSE

The two options may actually be phases of the same process Yet neishyther of them provides for preserving an integral hard currency-ruble zone It is possible though that in the first case the ruble will retain the status of a yard-stick in inter-repubshylican exchanges

I n the first case republics less depenshydent on imports from third countries and with a larger export potential may be in a more advantageous posishytion Computations show that Russia will suffer the heaviest balance of payments deficit with imports exshyceeding exports by 137 percent of the entire trade turnover including inshyter-regional exchanges This is beshycause products from third countries account for more than halfof all Russhysian imports For comparisons sake the share of import supplies in Ukraine and Byelorus trailing the Russian republic in this respect is twice as small In addition the deficit will to a large extent be due to the cheapness of raw materials exported to other republics

The Central Asian region will end up in an even worse position with the combined balance of payments deficit there equaling -178 percent Ukraine may also suffer a balance of paymen ts deficit of -63 percent due to the high proportion of supplies from other reshypublics in its overall imports Byelorus in contrast will enjoy a surplus of 5 percent as it is overshywhelmingly in the black in inter-reshypublican exchanges Transcaucasian republics will have a surplus of 15 percent for the same reason

The switch to world prices will change things dramatically Russia will be the only republic with a trade surplus (128 percent of the entire turnover) Ukraine and Kazakhstan will be able to slash their deficits but other reshygions will suffer catastrophically Transcaucasian republics will develop balance of paymen ts deficits at a level of -118 percent with Armenia and Georgia the hardest hit The Central sian regions deficit will burgeon to -215 percent The aggregate Baltic deficit will nearly triple to -213 pershycent and the Moldavian deficit will likely swell to -356 percent

No republic will be able to avoid the disastrous effects of such a downturn The changeover will provoke a severe structural crisis in republics around Russia as hundreds of enterprises running on Russian raw material s go broke An unprecedented recession in unemployment may follow with posshysibly up to 40 percent of the workforce in the Baltics losing their jobs

Russia can be expected to achieve a surplus in trade with Georgia quickly within a month-and-a-half after the switch the Baltics in two months the Central Asian region in two-and-ashyhalfmonths and Kazakhstan in threeshyand-a-halfmonths All indications are thatstructural maneuvering will Sl)on give a boost to the Byelorussian and Ukrainian currencies After a brief transitional period their exchange rates may even appreciate against the ruble because the two republics will enjoy a trade surplus with Russia in agricultural products and food

Efficiency Soviet Style ~~

~~ W_~~s~ ~~

~ ~ bullbull From the Souiet weekly Commersant

october 1991 10

Scenario C Transferrable ruble resuscitated

In the volatile situation of price deforshymities and uncertainty about the dishyvision of foreign debt the republics may preserve the Bank for Foreign Economic Activities (Vneshekoshynombank) as the single agency anshyswerable to third countries for the former USSRs state liabilities and to act as the chief manager of governshymentcredits The republics migh t use Vneshekonombank for transferring all account-settling in exportimport activities to republican foreign trade banks Raising prices on fuel power cotton ferrous and non-ferrous metshyals and possibly grain will be a comshypromise whereby raw material-exshyporting regions will not consider their interests infringed upon and raw material importers will not find themshyselves in a critical state Taking their cue from the defunct COMECON reshypublics can sign state contracts among themselves to supply products at prices that will remain stable for stipumiddot lated periods

In this case inter-republican exshychanges under state contracts and direct agreements between entershyprises in different regions can be served by an imaginary currency (a new transferrable ruble) with a stable exchange rate in relation to hard curshyrency The rate most likely will be regulated by an inter-republican agency patterned on COMECONs International Bank for Economic Coshyoperation - effectively a committee consisting of national bank represenshytatives engaged in facilitating intershyrepublican payments Republics may still introduce their own currencies Fluctuations will be determined mostly by the availability of goods in the markets the currency-creation policies of republican banks and the progress of economic reform in the regions Should this scenario materishyalize regions enjoying a surplus in foreign trade will naturally take the dominant positions in the new Intershynational Bank for Economic Cooperashytion

From Will it really work in the Soviet busimiddot ness weekly Commersant The authors Nikita Kirichenko Lyubou Strizhkova and Vera Shirobakoua comprise a research group

Volume 2 Number 9

Transition The Wor1d BankCECSE

Milestones of Transition

In late October Boris Yeltsin anshynounced a program of drastic ecoshynomic reforms for the Russian republic The plan would free prices and remove subsidies by the end of the year privatize large sections of state-owned industry and agriculture and create a more viable currency (Oil products and some consumer staples such as bread are likely to be excluded from the price liberalization) The price move will be preceded by a financial stabilization program deshysigned to mop up some of the bilshylions of eXCESS rubles in circulashytion and cut the former USSRs deficit slash grants to inefficient enterprises cut defense spending stop fundin~~ for about 70 Soviet ministries as of November 1 and end all economic assistance to forshyeign countries Other measures include dealing with newly indeshypendent Soviet republics in hard currency at world prices ending subsidizationjoining oth er repubshylics in a new economic community and providing safety nets for lowshyincome families Yeltsin proposed a new inter-state bank to be creshyated by Russia and the other reshypublics if the latter refrain from issuing their own currencies and agree to a system under which each republics vote would be proshyportionate to its capital If not Russia would form its own state bank and introduce its oVlm curshyrency said Yeltsin addingthathe was ready to head a new governshyment of national unity Inflation has reached a critical level and 55 percent offcimilies were living beshylow the poverty line he stated

The Europnan Bank for Reconshystruction an d Development is conshysidering establishing a new bank to finance trade from Eastern Eushyrope to the Soviet Union EBRD vice-president Ronald Freeman reminded a Paris conference that several East European countries have approached the EBRD for help in expcrtingto the USSR An

EBRD official in London said such a bank could be set up with the help of the World Bank the IMF the OECD and the EC with the EBRD charged with coordinating the new banks acshytivities EBRD President Jacques Attali raised the idea of creating the bank during the World BankllMF Annual Meeting in Bangkok in Octoshyber

Polands president Lech Walesa has hinted that he might appoint former Finance Minister Leszek Balcerowicz as head of the central bank Walesa wants to reorient economic reforms to soften their impact on the population give each Pole stock in privatized state industries intensify job retraining and stimulate local officials to begin auctioning vacant state property in their areas Poland could have as many as 35 million unemployed next year which would be the highest proshyportion of jobless in Europe saidJerzy Eysymont chief of the Polish Planshyning Office If current trends in the Polish economy continue unemployshyment could reach 16 to 18 percent of the workforce

Last year the Soviet Unions budget deficit reached 300 billion rubles or 25 percent of GNP and according to Soviet estimates it will be over 450 billion next year according to the latest figures of the Soviet central statistics office Goskomstat The Soshyviet money supply shot up sharply between June andAugust when up to 20 billion new rubles went into circushylation The state issued an additional 13 billion rubles during September In addition Soviet oil exports are expected to fall to 14 million barrels a day in the first quarter of 1992 half the level of the corresponding period in 1991 Goskomstat has announced that national income the main indishycator of the USSRs economic perforshymance fell 13 percent in the first nine months of 1991 The grain harvest is expected to be down a quarter from lastyears harvest atjust 160 million tons Goskomstat official Igor Pogosov told reporters that a unified financial

and credit policy has effectively broken down and that the repubshylics are pursuing separate and uncoordinated policies

Romanias new prime minister Theodor Stolojan says his top prishyority is to redress the impoverished economy Recent riots cost Romashynias economy almost $3 billion in delayed foreign loans and lost inshyvestment according to Economy Minister Eugen Dijmarescu The cost ofliving has more than tripled in the past 11 months Official figshyures showed that prices soared 2194 percent between October 1990 and October 1991

Germanys five leading economic research institutes report that western Germanys economic growth will slow to 2 percent in 1992 from 35 percent this year but eastern Germanys recovery shywith growth seen at 12 percent in 1992 following a 10 percent conshytraction this year - will expand united Germanys economy by 25 percent in 1992 In their annual economic report the five institutes predicted that the expansion would be uneven however with strong growth in the construction retail and service sectors and continued weakness in heavy industry

Inter-Korean trade has surged in 1991 totaling 124 million dollars in the first eight months asagainst 25 million dollars for the whole of 1990 Currently North Korea is informally seeking participation from South Korea in a possible Speshycial Economic Zone on the border with China and the USSR

The Chinese economy grew 68 pershycent in the first nine months of 1991 compared with the same period last year this makes the rate for the whole year above 6 percent according to Zhang Zhongji spokesman for the State Statistical Bureau The national economy has regained normal growth but some problems and unstable facshy

(continued on page 15)

Volume 2 Number 9 11 October 1991

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

losses d shy_-~o( f r

r r

gt ~ I

~ 07 ~

---

~Jl ~~

lt ~

Ci ~- ~

~

From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

Transition The World BonkCECSE

First China is at an early stage of development enjoying high growth rates because inter alia its starting base was low and growth is still largely extensive (Le originating mostly from the expansion of factors of production rather than from a pure increase in factor productivity) Sevshyeral decades ago when Eastern Euroshypean economies were similar to the current Chinese economy in terms of economic structure and level of de velshyopment they too achieved high growth rates despite highly centralshyized and autocratic systems Howshyever we know today that a lot of that growth (statistical problems aside) occurred in military and heavy indusshytry thus hardly contributing to the main goal of development a sustainshyable increase in the standard of livshying Nowadays Eastern Europe has mature but grossly Inefficient econoshymies that can be revitalized only through relatively fast restructuring and liberalization ofdomestic and forshyeign activities Slow reform will block change while er1suring a stagnantstashytus QUO

Second Eastern European economies are small and necessarily open econoshymies that havl~ much to gain right now from the exchange of knowledge technology investment and ideas with the EuropElan Community While China can affOld some isolation from the world markets mainly due to its immense size I~asternEurope clearly cannot In addition Eastern Europe is the textbook example of small open economies forced to adjust to permashynent sho(ks It is unlikely that China will face external shocks of similar magnitude in the near future conseshyquently there is much less urgency for a radical change Highly intervenshytionist policies which China is pursushying at this stage would almost cershytainly isolate Eastern Europe from the benefits 0 integration into the European Community

Third contrary to some perceptions the dramatic dEcline in output in Eastshyern Europe OVEr the past two years is systemic and as much the result of long-term problems as of short-term exogenous shc1cks such as the colshylapse of the CMEA and the use of restrictive stabilization programs Just as no stabilization of a

Volume 2 Number 9

hyperinflationary economy is achieved without a fast break on inshyflation sources no structural reform in Eastern Europe can succeed withshyout Quickly arresting the systemic causes of extreme structural imbalshyances and inefficiencies the wrong incentives for workers and managshyers overextension of state ownership and interference in the economy sysshytemic pervasive andarbitrary subsishydization and lack of accountability reward and effort

Fourth in Eastern Europe the perforshymance of state en terprises and banks the cornerstones of an economy is appalling compared to the situation for these institutions in China Eastshyern Europes state enterprises and banks have been undergoing reform and introducing various market crishyteria for more than a decade (for sevshyeral decades in Yugoslavia) but they have failed to bring about substan tial results This is because the governshyments failed to alter fundamentally the structure of ownership and the corresponding microeconomic incenshytives In Yugoslavia frequentinstitushytionalreform and continuous institushytional experimentation were followed by extreme financial indiscipline and the entropy of the system In fact the country grew more rapidly before reshyform Slow reform in Hungary and Poland over the past decade created instability and was accompanied by expansion of the black market economy In Bulgaria for a full year after the overthrow of the Zivkov govshyernment failure to start systemic reshyform contributed to the severe downshyturn of the economy Clearly pieceshymeal reform never managed to reshyverse the continuous decline of the East European economies a decline that became more drastic and obvishyous only in the past two years

Fifth as long as Chinas piecemeal reforms work its government will not want to embark on more radicalreshyform that it cannot easily controL In China peer pressure the Commushynist party influence and family and community ties apparently work as important complements to 01 substishytutes for the standard market incenshytives In Eastern Europe these facshytors effectively dissolved in the tushymult of the disappearance of the poshy

7

litical monopoly while market incenshytives are still to develop with the emerging private sector Given the incentive and institutional gaps the need for privatization in Eastern Eushyrope is mOre urgent than it would be in China for example Although the entry into the market of new private firms is already impressive it cannot alter the character of these economies in the immediate future and thus privatization is the pragmatic imperashytive of the day And the longer it is delayed the clearer it will become that the all-encompassing state secshytor alone cannot pull the economies out of their depression

Finally the international economic environment and the strong integrashytion forces at work in Western Europe clearly favor countries that are firmly committed to radical reform and free market policies Why should Eastern Europe not take advantage of this historic opportunity to get the best of the West and in record time The readiness of the West to provide adshyvice technical expertise and knowshyhow is more critical for Eastern Eushyrope than is a deluge of money at this time short of humanitarian aid and the economieslifeblood of short-term trade credits For their own benefit East European countries need to implement systemic reform particushylarly privatization as quickly as posshysible Waiting will delay the benefits of reform too far into the future while the costs will grow and possibly strangle the current changes

Zeljko Bogetic EM5CO The World Bcmk

Bela Csikos-Nagy

Whatever actually happens in Censhytral and Eastern Europe (CEE) and China is there really only a two-track approach to economic reform Inderji t Singhs excellent article in Transishytion touches on the concerns about countries with a socialist economic pattern

N everthelesslet me look at this probshylem from a different point of view Ido not believe that CEE on the one side

October 1991

Transition The World BonkCECSE

and China on the other can be examshyined at the same level In CEE a World BankjlMF Agendasystem transfonnation is going on whereas in China only the refonn of socialist economic planning is on the agenda In the first case a transforshymation Can be observed - from a socialist economy to a social market system and what happens is actually a re-capitalization process In conshytrast China wants to transfonn its socialist commodity-producing economy into a socialist market sysshytem What actually is happening in China (including the restoration of quasi-private property rights) is simishylar to the Hungarian economic refonn of the early 1980s

The two-track approach certainly exshyists although only in the context of Central and Eastern Europe Investishygating the matter from this aspect the issues debated in the article must be expanded I suggest addressing the following bull privatization vs reprivatization bull popular privatization vs the comshymercial variant bull liberalization and deregulation a hannonized vs a controversial solushytion bull social cost narrow vs widespread interpretation and bull maintaining international solvency vs suspending debt servicing etc

Last but not least as I see it the author was influenced by the overshywhelming view so typical of the peshyriod 1989-90 the time when shock therapy was considered to be an adshyequate remedy for crisis management in post-communist societies This comes to the fore strikingly in the paragraph headed Pricerefonn radishycal vs piecemeal I do not think the actual situation at the end of 1991 is what was expected by policymakers propounding this line in 198990

Bela Csik6smiddotNagy is a prominent economist and president of tlu Hungarian Eronomic Asmiddot sociaticn

Moscow Joke

QueBlion What is the new relationshyship among the pound the dollar and

i the ruble

Anwer A pound of rubles =1 dollar

October 1991

First aid from the Sisters

With the USSR now a special associshyate member of the IMF the Fund can begin immediate and wide-ranging technical assistance IMF experts are already in Moscow providing advice on macroeconomic policies exchange and payments systems tax and blmkshying reform and statistics and Soviet officials will be invited to IMF trainshyingcourses in Washington The stipushylations for the fonner Soviet Unions special association can beextended to individual Soviet republics as well The World Bank signed a technical assistance agreement the USSR and the Republics to be financed from a $30 million trust fund The agreeshyment focuses on assisting developshyment of a social safety net reforming the energy agriculture and housing sectors and other key industries deshyvelopingthe private sector and trainshying officials The Bank will also open an office in Moscow to facilitate the implementation of the agreement

IFC in CEE

According to the International Fishynance Corporations recent annual report the greatest expansion of its investment activity in the 1990s will occur in Central and Eastern Europe Out of an expected $4 billion a year in finanCing the IFC expects to approve up to $350 million annually for the CEE region - a 190 percent increase overthe amount approved in FY1991 Algeria Czechoslovakia Mongolia Namibia Romania and Bulgaria have joined the IFC in the past year raisshying the number of member countries to 142

Financial boost to Nicaragua

The World Bank approved a fast-disshybursing $110 million economic reshycoverycredit to Nicaragua from IDA the Banks concessionary-lending afshyfiliate The credit is providing supshyport to cut public sector employment revitalize the civil service reform the financial sector (provide a new regushylatory body and license four private

8

banks) and privatize vast sectors of the economy (return 350 state-owned businesses to the private sector) The IDA credit also supports the introshyduction of trade tax and regulatory reforms to promote private-sector proshyduction The Inter-American Develshyopment Bank is expected to co-finance the IDA credit with $130 million In addition the IMF recently approved a $557 million standby loan At the same time IDA is mobilizing addishytional concessional aid through its chairmanship of Nicaraguas consulshytative group of aid donors

Romanias health care

Romania will begin overhauling its health-care system control the spread of AIDS and improve family-planshyning services through a project supshyported by a $150 million World Bank loan (see TRANSITION September 1991) The project aims to reverse the worsening health conditions and imshyprove the health-care system It inshycludes improvements to rural healthshycare centers a health-education camshypaign strengthened family-planning programs training for health-care workers and provision of medical supplies for hospitals and other health facilities The loan will finance imshyports of medical supplies including disposable syringes and autoclaves The project will make birth control devices affordable and widely availshyable

Support to Laos

An IDA credit of$40 million will proshymote the Laotian Governments efshyforts to institute a market economy The credit wil1 support public entershyprise reform and privatization efforts to boost government revenues and measures to improve the management of public resources The governments privatization program began in 1991 The Bank will assist with auctioning offsmall public enterprises over the next three years Larger public en tershyprises with 30 or more employees will be sold at the rate of20 to 30 a year

(continued on page 14)

Volume 2 Number 9

0 ---z

Georgll

(1) Clntrlll Mia

Transition The World BankCECSE

Quotation of the Month Ukraine and Byelorus will clearly be the front runshyners in a new economic alliance Commersant on future inter-republic ties

The real economic independence of sovereign republics will in many ways depend on their

place in inter-republic exchanges These contacts will determine regardshyless of whether an economic agreeshyment is conclud~dor not the business relations of enterprises in the new states their balances of payments and ifthe ruble zone comes apart the exchange rates of their national curshyrencies

The combination of two factors - the export possibilities of the breakaway territories and the formal principles of an economic agreement - will deshycide the evolution of economic condishytions in every lregion Computations demonstrate that under any scenario of forging an economic alliance Ukraine and Byelorus will clearly be the front runners while the Central Asian nations will not be able to achieve economic independence

served in the transitional period and commodity exchanges between them may be based on current prices This possibility is linked to the central authorities position through the Yavlinsky program The inertia of inter-republican contacts is also due to the fact that more than a quarter of republican GNP is involved in intershyregional exchanges

Should this forecast come true Russhysia Ukraine Byelorus and Azershybaijan will remain donors (if one also takes into account republican contrishybutions to exports to third countries) Byelorus and Ukraine will then shoulshyder the heaviest donor burden All other regions will have to be subsishydized because of the lopsided distrishybution of centrally-imported resources and the balance of payments deficits in inter-republican trade However Latvia and Lithuania will almost be able to balance their accounts in dealshy

ing with other regions This will also be true of Georgia Armenia and Moldavia if their political situations stabilize and if the raw materials blockade is lifted

Scenario B Changeover to world prices

Most republics see a way out by conshyverting to world prices on exports to otherregionsand by introducing their own currencies as a means of protectshying their economics Should the nashytional balance of payments be divided completely among republics and they adopt separate currencies two opshytions are possible bull Republics will trade with third counshytries independently on the basis of world prices Payments among reshypublics will also be in hard currency but based on existing ruble prices bull Republics will rely on world prices for commerce among themselves

The most economically independent regions includl~ the Russian repubshylic where products supplied by other republics account for only 8 percent of gross consumption Ukraine (12 pershycent) and Kazakhstan and Azerbaijan (some 16 percent each) Only three of these republics report a surplus in inter-republican trade in current doshymestic prices -- Azerbaijan (+23 pershycent) Russia (+3 percent) and Ukraine (+06 percent) Elsewhere supplies from other republics are reshysponsible for 20 to 25 percent of overshyall consumption and exercise much greater influence on local economies

Scenario A With current prices

Although trade agreements among republics will probably be drastically changed in thl~ near future existing economic relations between entershypri ses in various regions may be pre-

Volume 2 Number 9

Possible dynamics of republican currency rates otter transition to hard currency and world prices In inleNepublican settlements

Ukrllnlln

marchlll BIIlIca krona

9 October 1991

-Transition The World BankCECSE

The two options may actually be phases of the same process Yet neishyther of them provides for preserving an integral hard currency-ruble zone It is possible though that in the first case the ruble will retain the status of a yard-stick in inter-repubshylican exchanges

I n the first case republics less depenshydent on imports from third countries and with a larger export potential may be in a more advantageous posishytion Computations show that Russia will suffer the heaviest balance of payments deficit with imports exshyceeding exports by 137 percent of the entire trade turnover including inshyter-regional exchanges This is beshycause products from third countries account for more than halfof all Russhysian imports For comparisons sake the share of import supplies in Ukraine and Byelorus trailing the Russian republic in this respect is twice as small In addition the deficit will to a large extent be due to the cheapness of raw materials exported to other republics

The Central Asian region will end up in an even worse position with the combined balance of payments deficit there equaling -178 percent Ukraine may also suffer a balance of paymen ts deficit of -63 percent due to the high proportion of supplies from other reshypublics in its overall imports Byelorus in contrast will enjoy a surplus of 5 percent as it is overshywhelmingly in the black in inter-reshypublican exchanges Transcaucasian republics will have a surplus of 15 percent for the same reason

The switch to world prices will change things dramatically Russia will be the only republic with a trade surplus (128 percent of the entire turnover) Ukraine and Kazakhstan will be able to slash their deficits but other reshygions will suffer catastrophically Transcaucasian republics will develop balance of paymen ts deficits at a level of -118 percent with Armenia and Georgia the hardest hit The Central sian regions deficit will burgeon to -215 percent The aggregate Baltic deficit will nearly triple to -213 pershycent and the Moldavian deficit will likely swell to -356 percent

No republic will be able to avoid the disastrous effects of such a downturn The changeover will provoke a severe structural crisis in republics around Russia as hundreds of enterprises running on Russian raw material s go broke An unprecedented recession in unemployment may follow with posshysibly up to 40 percent of the workforce in the Baltics losing their jobs

Russia can be expected to achieve a surplus in trade with Georgia quickly within a month-and-a-half after the switch the Baltics in two months the Central Asian region in two-and-ashyhalfmonths and Kazakhstan in threeshyand-a-halfmonths All indications are thatstructural maneuvering will Sl)on give a boost to the Byelorussian and Ukrainian currencies After a brief transitional period their exchange rates may even appreciate against the ruble because the two republics will enjoy a trade surplus with Russia in agricultural products and food

Efficiency Soviet Style ~~

~~ W_~~s~ ~~

~ ~ bullbull From the Souiet weekly Commersant

october 1991 10

Scenario C Transferrable ruble resuscitated

In the volatile situation of price deforshymities and uncertainty about the dishyvision of foreign debt the republics may preserve the Bank for Foreign Economic Activities (Vneshekoshynombank) as the single agency anshyswerable to third countries for the former USSRs state liabilities and to act as the chief manager of governshymentcredits The republics migh t use Vneshekonombank for transferring all account-settling in exportimport activities to republican foreign trade banks Raising prices on fuel power cotton ferrous and non-ferrous metshyals and possibly grain will be a comshypromise whereby raw material-exshyporting regions will not consider their interests infringed upon and raw material importers will not find themshyselves in a critical state Taking their cue from the defunct COMECON reshypublics can sign state contracts among themselves to supply products at prices that will remain stable for stipumiddot lated periods

In this case inter-republican exshychanges under state contracts and direct agreements between entershyprises in different regions can be served by an imaginary currency (a new transferrable ruble) with a stable exchange rate in relation to hard curshyrency The rate most likely will be regulated by an inter-republican agency patterned on COMECONs International Bank for Economic Coshyoperation - effectively a committee consisting of national bank represenshytatives engaged in facilitating intershyrepublican payments Republics may still introduce their own currencies Fluctuations will be determined mostly by the availability of goods in the markets the currency-creation policies of republican banks and the progress of economic reform in the regions Should this scenario materishyalize regions enjoying a surplus in foreign trade will naturally take the dominant positions in the new Intershynational Bank for Economic Cooperashytion

From Will it really work in the Soviet busimiddot ness weekly Commersant The authors Nikita Kirichenko Lyubou Strizhkova and Vera Shirobakoua comprise a research group

Volume 2 Number 9

Transition The Wor1d BankCECSE

Milestones of Transition

In late October Boris Yeltsin anshynounced a program of drastic ecoshynomic reforms for the Russian republic The plan would free prices and remove subsidies by the end of the year privatize large sections of state-owned industry and agriculture and create a more viable currency (Oil products and some consumer staples such as bread are likely to be excluded from the price liberalization) The price move will be preceded by a financial stabilization program deshysigned to mop up some of the bilshylions of eXCESS rubles in circulashytion and cut the former USSRs deficit slash grants to inefficient enterprises cut defense spending stop fundin~~ for about 70 Soviet ministries as of November 1 and end all economic assistance to forshyeign countries Other measures include dealing with newly indeshypendent Soviet republics in hard currency at world prices ending subsidizationjoining oth er repubshylics in a new economic community and providing safety nets for lowshyincome families Yeltsin proposed a new inter-state bank to be creshyated by Russia and the other reshypublics if the latter refrain from issuing their own currencies and agree to a system under which each republics vote would be proshyportionate to its capital If not Russia would form its own state bank and introduce its oVlm curshyrency said Yeltsin addingthathe was ready to head a new governshyment of national unity Inflation has reached a critical level and 55 percent offcimilies were living beshylow the poverty line he stated

The Europnan Bank for Reconshystruction an d Development is conshysidering establishing a new bank to finance trade from Eastern Eushyrope to the Soviet Union EBRD vice-president Ronald Freeman reminded a Paris conference that several East European countries have approached the EBRD for help in expcrtingto the USSR An

EBRD official in London said such a bank could be set up with the help of the World Bank the IMF the OECD and the EC with the EBRD charged with coordinating the new banks acshytivities EBRD President Jacques Attali raised the idea of creating the bank during the World BankllMF Annual Meeting in Bangkok in Octoshyber

Polands president Lech Walesa has hinted that he might appoint former Finance Minister Leszek Balcerowicz as head of the central bank Walesa wants to reorient economic reforms to soften their impact on the population give each Pole stock in privatized state industries intensify job retraining and stimulate local officials to begin auctioning vacant state property in their areas Poland could have as many as 35 million unemployed next year which would be the highest proshyportion of jobless in Europe saidJerzy Eysymont chief of the Polish Planshyning Office If current trends in the Polish economy continue unemployshyment could reach 16 to 18 percent of the workforce

Last year the Soviet Unions budget deficit reached 300 billion rubles or 25 percent of GNP and according to Soviet estimates it will be over 450 billion next year according to the latest figures of the Soviet central statistics office Goskomstat The Soshyviet money supply shot up sharply between June andAugust when up to 20 billion new rubles went into circushylation The state issued an additional 13 billion rubles during September In addition Soviet oil exports are expected to fall to 14 million barrels a day in the first quarter of 1992 half the level of the corresponding period in 1991 Goskomstat has announced that national income the main indishycator of the USSRs economic perforshymance fell 13 percent in the first nine months of 1991 The grain harvest is expected to be down a quarter from lastyears harvest atjust 160 million tons Goskomstat official Igor Pogosov told reporters that a unified financial

and credit policy has effectively broken down and that the repubshylics are pursuing separate and uncoordinated policies

Romanias new prime minister Theodor Stolojan says his top prishyority is to redress the impoverished economy Recent riots cost Romashynias economy almost $3 billion in delayed foreign loans and lost inshyvestment according to Economy Minister Eugen Dijmarescu The cost ofliving has more than tripled in the past 11 months Official figshyures showed that prices soared 2194 percent between October 1990 and October 1991

Germanys five leading economic research institutes report that western Germanys economic growth will slow to 2 percent in 1992 from 35 percent this year but eastern Germanys recovery shywith growth seen at 12 percent in 1992 following a 10 percent conshytraction this year - will expand united Germanys economy by 25 percent in 1992 In their annual economic report the five institutes predicted that the expansion would be uneven however with strong growth in the construction retail and service sectors and continued weakness in heavy industry

Inter-Korean trade has surged in 1991 totaling 124 million dollars in the first eight months asagainst 25 million dollars for the whole of 1990 Currently North Korea is informally seeking participation from South Korea in a possible Speshycial Economic Zone on the border with China and the USSR

The Chinese economy grew 68 pershycent in the first nine months of 1991 compared with the same period last year this makes the rate for the whole year above 6 percent according to Zhang Zhongji spokesman for the State Statistical Bureau The national economy has regained normal growth but some problems and unstable facshy

(continued on page 15)

Volume 2 Number 9 11 October 1991

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

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~

From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

Transition The World BonkCECSE

and China on the other can be examshyined at the same level In CEE a World BankjlMF Agendasystem transfonnation is going on whereas in China only the refonn of socialist economic planning is on the agenda In the first case a transforshymation Can be observed - from a socialist economy to a social market system and what happens is actually a re-capitalization process In conshytrast China wants to transfonn its socialist commodity-producing economy into a socialist market sysshytem What actually is happening in China (including the restoration of quasi-private property rights) is simishylar to the Hungarian economic refonn of the early 1980s

The two-track approach certainly exshyists although only in the context of Central and Eastern Europe Investishygating the matter from this aspect the issues debated in the article must be expanded I suggest addressing the following bull privatization vs reprivatization bull popular privatization vs the comshymercial variant bull liberalization and deregulation a hannonized vs a controversial solushytion bull social cost narrow vs widespread interpretation and bull maintaining international solvency vs suspending debt servicing etc

Last but not least as I see it the author was influenced by the overshywhelming view so typical of the peshyriod 1989-90 the time when shock therapy was considered to be an adshyequate remedy for crisis management in post-communist societies This comes to the fore strikingly in the paragraph headed Pricerefonn radishycal vs piecemeal I do not think the actual situation at the end of 1991 is what was expected by policymakers propounding this line in 198990

Bela Csik6smiddotNagy is a prominent economist and president of tlu Hungarian Eronomic Asmiddot sociaticn

Moscow Joke

QueBlion What is the new relationshyship among the pound the dollar and

i the ruble

Anwer A pound of rubles =1 dollar

October 1991

First aid from the Sisters

With the USSR now a special associshyate member of the IMF the Fund can begin immediate and wide-ranging technical assistance IMF experts are already in Moscow providing advice on macroeconomic policies exchange and payments systems tax and blmkshying reform and statistics and Soviet officials will be invited to IMF trainshyingcourses in Washington The stipushylations for the fonner Soviet Unions special association can beextended to individual Soviet republics as well The World Bank signed a technical assistance agreement the USSR and the Republics to be financed from a $30 million trust fund The agreeshyment focuses on assisting developshyment of a social safety net reforming the energy agriculture and housing sectors and other key industries deshyvelopingthe private sector and trainshying officials The Bank will also open an office in Moscow to facilitate the implementation of the agreement

IFC in CEE

According to the International Fishynance Corporations recent annual report the greatest expansion of its investment activity in the 1990s will occur in Central and Eastern Europe Out of an expected $4 billion a year in finanCing the IFC expects to approve up to $350 million annually for the CEE region - a 190 percent increase overthe amount approved in FY1991 Algeria Czechoslovakia Mongolia Namibia Romania and Bulgaria have joined the IFC in the past year raisshying the number of member countries to 142

Financial boost to Nicaragua

The World Bank approved a fast-disshybursing $110 million economic reshycoverycredit to Nicaragua from IDA the Banks concessionary-lending afshyfiliate The credit is providing supshyport to cut public sector employment revitalize the civil service reform the financial sector (provide a new regushylatory body and license four private

8

banks) and privatize vast sectors of the economy (return 350 state-owned businesses to the private sector) The IDA credit also supports the introshyduction of trade tax and regulatory reforms to promote private-sector proshyduction The Inter-American Develshyopment Bank is expected to co-finance the IDA credit with $130 million In addition the IMF recently approved a $557 million standby loan At the same time IDA is mobilizing addishytional concessional aid through its chairmanship of Nicaraguas consulshytative group of aid donors

Romanias health care

Romania will begin overhauling its health-care system control the spread of AIDS and improve family-planshyning services through a project supshyported by a $150 million World Bank loan (see TRANSITION September 1991) The project aims to reverse the worsening health conditions and imshyprove the health-care system It inshycludes improvements to rural healthshycare centers a health-education camshypaign strengthened family-planning programs training for health-care workers and provision of medical supplies for hospitals and other health facilities The loan will finance imshyports of medical supplies including disposable syringes and autoclaves The project will make birth control devices affordable and widely availshyable

Support to Laos

An IDA credit of$40 million will proshymote the Laotian Governments efshyforts to institute a market economy The credit wil1 support public entershyprise reform and privatization efforts to boost government revenues and measures to improve the management of public resources The governments privatization program began in 1991 The Bank will assist with auctioning offsmall public enterprises over the next three years Larger public en tershyprises with 30 or more employees will be sold at the rate of20 to 30 a year

(continued on page 14)

Volume 2 Number 9

0 ---z

Georgll

(1) Clntrlll Mia

Transition The World BankCECSE

Quotation of the Month Ukraine and Byelorus will clearly be the front runshyners in a new economic alliance Commersant on future inter-republic ties

The real economic independence of sovereign republics will in many ways depend on their

place in inter-republic exchanges These contacts will determine regardshyless of whether an economic agreeshyment is conclud~dor not the business relations of enterprises in the new states their balances of payments and ifthe ruble zone comes apart the exchange rates of their national curshyrencies

The combination of two factors - the export possibilities of the breakaway territories and the formal principles of an economic agreement - will deshycide the evolution of economic condishytions in every lregion Computations demonstrate that under any scenario of forging an economic alliance Ukraine and Byelorus will clearly be the front runners while the Central Asian nations will not be able to achieve economic independence

served in the transitional period and commodity exchanges between them may be based on current prices This possibility is linked to the central authorities position through the Yavlinsky program The inertia of inter-republican contacts is also due to the fact that more than a quarter of republican GNP is involved in intershyregional exchanges

Should this forecast come true Russhysia Ukraine Byelorus and Azershybaijan will remain donors (if one also takes into account republican contrishybutions to exports to third countries) Byelorus and Ukraine will then shoulshyder the heaviest donor burden All other regions will have to be subsishydized because of the lopsided distrishybution of centrally-imported resources and the balance of payments deficits in inter-republican trade However Latvia and Lithuania will almost be able to balance their accounts in dealshy

ing with other regions This will also be true of Georgia Armenia and Moldavia if their political situations stabilize and if the raw materials blockade is lifted

Scenario B Changeover to world prices

Most republics see a way out by conshyverting to world prices on exports to otherregionsand by introducing their own currencies as a means of protectshying their economics Should the nashytional balance of payments be divided completely among republics and they adopt separate currencies two opshytions are possible bull Republics will trade with third counshytries independently on the basis of world prices Payments among reshypublics will also be in hard currency but based on existing ruble prices bull Republics will rely on world prices for commerce among themselves

The most economically independent regions includl~ the Russian repubshylic where products supplied by other republics account for only 8 percent of gross consumption Ukraine (12 pershycent) and Kazakhstan and Azerbaijan (some 16 percent each) Only three of these republics report a surplus in inter-republican trade in current doshymestic prices -- Azerbaijan (+23 pershycent) Russia (+3 percent) and Ukraine (+06 percent) Elsewhere supplies from other republics are reshysponsible for 20 to 25 percent of overshyall consumption and exercise much greater influence on local economies

Scenario A With current prices

Although trade agreements among republics will probably be drastically changed in thl~ near future existing economic relations between entershypri ses in various regions may be pre-

Volume 2 Number 9

Possible dynamics of republican currency rates otter transition to hard currency and world prices In inleNepublican settlements

Ukrllnlln

marchlll BIIlIca krona

9 October 1991

-Transition The World BankCECSE

The two options may actually be phases of the same process Yet neishyther of them provides for preserving an integral hard currency-ruble zone It is possible though that in the first case the ruble will retain the status of a yard-stick in inter-repubshylican exchanges

I n the first case republics less depenshydent on imports from third countries and with a larger export potential may be in a more advantageous posishytion Computations show that Russia will suffer the heaviest balance of payments deficit with imports exshyceeding exports by 137 percent of the entire trade turnover including inshyter-regional exchanges This is beshycause products from third countries account for more than halfof all Russhysian imports For comparisons sake the share of import supplies in Ukraine and Byelorus trailing the Russian republic in this respect is twice as small In addition the deficit will to a large extent be due to the cheapness of raw materials exported to other republics

The Central Asian region will end up in an even worse position with the combined balance of payments deficit there equaling -178 percent Ukraine may also suffer a balance of paymen ts deficit of -63 percent due to the high proportion of supplies from other reshypublics in its overall imports Byelorus in contrast will enjoy a surplus of 5 percent as it is overshywhelmingly in the black in inter-reshypublican exchanges Transcaucasian republics will have a surplus of 15 percent for the same reason

The switch to world prices will change things dramatically Russia will be the only republic with a trade surplus (128 percent of the entire turnover) Ukraine and Kazakhstan will be able to slash their deficits but other reshygions will suffer catastrophically Transcaucasian republics will develop balance of paymen ts deficits at a level of -118 percent with Armenia and Georgia the hardest hit The Central sian regions deficit will burgeon to -215 percent The aggregate Baltic deficit will nearly triple to -213 pershycent and the Moldavian deficit will likely swell to -356 percent

No republic will be able to avoid the disastrous effects of such a downturn The changeover will provoke a severe structural crisis in republics around Russia as hundreds of enterprises running on Russian raw material s go broke An unprecedented recession in unemployment may follow with posshysibly up to 40 percent of the workforce in the Baltics losing their jobs

Russia can be expected to achieve a surplus in trade with Georgia quickly within a month-and-a-half after the switch the Baltics in two months the Central Asian region in two-and-ashyhalfmonths and Kazakhstan in threeshyand-a-halfmonths All indications are thatstructural maneuvering will Sl)on give a boost to the Byelorussian and Ukrainian currencies After a brief transitional period their exchange rates may even appreciate against the ruble because the two republics will enjoy a trade surplus with Russia in agricultural products and food

Efficiency Soviet Style ~~

~~ W_~~s~ ~~

~ ~ bullbull From the Souiet weekly Commersant

october 1991 10

Scenario C Transferrable ruble resuscitated

In the volatile situation of price deforshymities and uncertainty about the dishyvision of foreign debt the republics may preserve the Bank for Foreign Economic Activities (Vneshekoshynombank) as the single agency anshyswerable to third countries for the former USSRs state liabilities and to act as the chief manager of governshymentcredits The republics migh t use Vneshekonombank for transferring all account-settling in exportimport activities to republican foreign trade banks Raising prices on fuel power cotton ferrous and non-ferrous metshyals and possibly grain will be a comshypromise whereby raw material-exshyporting regions will not consider their interests infringed upon and raw material importers will not find themshyselves in a critical state Taking their cue from the defunct COMECON reshypublics can sign state contracts among themselves to supply products at prices that will remain stable for stipumiddot lated periods

In this case inter-republican exshychanges under state contracts and direct agreements between entershyprises in different regions can be served by an imaginary currency (a new transferrable ruble) with a stable exchange rate in relation to hard curshyrency The rate most likely will be regulated by an inter-republican agency patterned on COMECONs International Bank for Economic Coshyoperation - effectively a committee consisting of national bank represenshytatives engaged in facilitating intershyrepublican payments Republics may still introduce their own currencies Fluctuations will be determined mostly by the availability of goods in the markets the currency-creation policies of republican banks and the progress of economic reform in the regions Should this scenario materishyalize regions enjoying a surplus in foreign trade will naturally take the dominant positions in the new Intershynational Bank for Economic Cooperashytion

From Will it really work in the Soviet busimiddot ness weekly Commersant The authors Nikita Kirichenko Lyubou Strizhkova and Vera Shirobakoua comprise a research group

Volume 2 Number 9

Transition The Wor1d BankCECSE

Milestones of Transition

In late October Boris Yeltsin anshynounced a program of drastic ecoshynomic reforms for the Russian republic The plan would free prices and remove subsidies by the end of the year privatize large sections of state-owned industry and agriculture and create a more viable currency (Oil products and some consumer staples such as bread are likely to be excluded from the price liberalization) The price move will be preceded by a financial stabilization program deshysigned to mop up some of the bilshylions of eXCESS rubles in circulashytion and cut the former USSRs deficit slash grants to inefficient enterprises cut defense spending stop fundin~~ for about 70 Soviet ministries as of November 1 and end all economic assistance to forshyeign countries Other measures include dealing with newly indeshypendent Soviet republics in hard currency at world prices ending subsidizationjoining oth er repubshylics in a new economic community and providing safety nets for lowshyincome families Yeltsin proposed a new inter-state bank to be creshyated by Russia and the other reshypublics if the latter refrain from issuing their own currencies and agree to a system under which each republics vote would be proshyportionate to its capital If not Russia would form its own state bank and introduce its oVlm curshyrency said Yeltsin addingthathe was ready to head a new governshyment of national unity Inflation has reached a critical level and 55 percent offcimilies were living beshylow the poverty line he stated

The Europnan Bank for Reconshystruction an d Development is conshysidering establishing a new bank to finance trade from Eastern Eushyrope to the Soviet Union EBRD vice-president Ronald Freeman reminded a Paris conference that several East European countries have approached the EBRD for help in expcrtingto the USSR An

EBRD official in London said such a bank could be set up with the help of the World Bank the IMF the OECD and the EC with the EBRD charged with coordinating the new banks acshytivities EBRD President Jacques Attali raised the idea of creating the bank during the World BankllMF Annual Meeting in Bangkok in Octoshyber

Polands president Lech Walesa has hinted that he might appoint former Finance Minister Leszek Balcerowicz as head of the central bank Walesa wants to reorient economic reforms to soften their impact on the population give each Pole stock in privatized state industries intensify job retraining and stimulate local officials to begin auctioning vacant state property in their areas Poland could have as many as 35 million unemployed next year which would be the highest proshyportion of jobless in Europe saidJerzy Eysymont chief of the Polish Planshyning Office If current trends in the Polish economy continue unemployshyment could reach 16 to 18 percent of the workforce

Last year the Soviet Unions budget deficit reached 300 billion rubles or 25 percent of GNP and according to Soviet estimates it will be over 450 billion next year according to the latest figures of the Soviet central statistics office Goskomstat The Soshyviet money supply shot up sharply between June andAugust when up to 20 billion new rubles went into circushylation The state issued an additional 13 billion rubles during September In addition Soviet oil exports are expected to fall to 14 million barrels a day in the first quarter of 1992 half the level of the corresponding period in 1991 Goskomstat has announced that national income the main indishycator of the USSRs economic perforshymance fell 13 percent in the first nine months of 1991 The grain harvest is expected to be down a quarter from lastyears harvest atjust 160 million tons Goskomstat official Igor Pogosov told reporters that a unified financial

and credit policy has effectively broken down and that the repubshylics are pursuing separate and uncoordinated policies

Romanias new prime minister Theodor Stolojan says his top prishyority is to redress the impoverished economy Recent riots cost Romashynias economy almost $3 billion in delayed foreign loans and lost inshyvestment according to Economy Minister Eugen Dijmarescu The cost ofliving has more than tripled in the past 11 months Official figshyures showed that prices soared 2194 percent between October 1990 and October 1991

Germanys five leading economic research institutes report that western Germanys economic growth will slow to 2 percent in 1992 from 35 percent this year but eastern Germanys recovery shywith growth seen at 12 percent in 1992 following a 10 percent conshytraction this year - will expand united Germanys economy by 25 percent in 1992 In their annual economic report the five institutes predicted that the expansion would be uneven however with strong growth in the construction retail and service sectors and continued weakness in heavy industry

Inter-Korean trade has surged in 1991 totaling 124 million dollars in the first eight months asagainst 25 million dollars for the whole of 1990 Currently North Korea is informally seeking participation from South Korea in a possible Speshycial Economic Zone on the border with China and the USSR

The Chinese economy grew 68 pershycent in the first nine months of 1991 compared with the same period last year this makes the rate for the whole year above 6 percent according to Zhang Zhongji spokesman for the State Statistical Bureau The national economy has regained normal growth but some problems and unstable facshy

(continued on page 15)

Volume 2 Number 9 11 October 1991

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

losses d shy_-~o( f r

r r

gt ~ I

~ 07 ~

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From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

0 ---z

Georgll

(1) Clntrlll Mia

Transition The World BankCECSE

Quotation of the Month Ukraine and Byelorus will clearly be the front runshyners in a new economic alliance Commersant on future inter-republic ties

The real economic independence of sovereign republics will in many ways depend on their

place in inter-republic exchanges These contacts will determine regardshyless of whether an economic agreeshyment is conclud~dor not the business relations of enterprises in the new states their balances of payments and ifthe ruble zone comes apart the exchange rates of their national curshyrencies

The combination of two factors - the export possibilities of the breakaway territories and the formal principles of an economic agreement - will deshycide the evolution of economic condishytions in every lregion Computations demonstrate that under any scenario of forging an economic alliance Ukraine and Byelorus will clearly be the front runners while the Central Asian nations will not be able to achieve economic independence

served in the transitional period and commodity exchanges between them may be based on current prices This possibility is linked to the central authorities position through the Yavlinsky program The inertia of inter-republican contacts is also due to the fact that more than a quarter of republican GNP is involved in intershyregional exchanges

Should this forecast come true Russhysia Ukraine Byelorus and Azershybaijan will remain donors (if one also takes into account republican contrishybutions to exports to third countries) Byelorus and Ukraine will then shoulshyder the heaviest donor burden All other regions will have to be subsishydized because of the lopsided distrishybution of centrally-imported resources and the balance of payments deficits in inter-republican trade However Latvia and Lithuania will almost be able to balance their accounts in dealshy

ing with other regions This will also be true of Georgia Armenia and Moldavia if their political situations stabilize and if the raw materials blockade is lifted

Scenario B Changeover to world prices

Most republics see a way out by conshyverting to world prices on exports to otherregionsand by introducing their own currencies as a means of protectshying their economics Should the nashytional balance of payments be divided completely among republics and they adopt separate currencies two opshytions are possible bull Republics will trade with third counshytries independently on the basis of world prices Payments among reshypublics will also be in hard currency but based on existing ruble prices bull Republics will rely on world prices for commerce among themselves

The most economically independent regions includl~ the Russian repubshylic where products supplied by other republics account for only 8 percent of gross consumption Ukraine (12 pershycent) and Kazakhstan and Azerbaijan (some 16 percent each) Only three of these republics report a surplus in inter-republican trade in current doshymestic prices -- Azerbaijan (+23 pershycent) Russia (+3 percent) and Ukraine (+06 percent) Elsewhere supplies from other republics are reshysponsible for 20 to 25 percent of overshyall consumption and exercise much greater influence on local economies

Scenario A With current prices

Although trade agreements among republics will probably be drastically changed in thl~ near future existing economic relations between entershypri ses in various regions may be pre-

Volume 2 Number 9

Possible dynamics of republican currency rates otter transition to hard currency and world prices In inleNepublican settlements

Ukrllnlln

marchlll BIIlIca krona

9 October 1991

-Transition The World BankCECSE

The two options may actually be phases of the same process Yet neishyther of them provides for preserving an integral hard currency-ruble zone It is possible though that in the first case the ruble will retain the status of a yard-stick in inter-repubshylican exchanges

I n the first case republics less depenshydent on imports from third countries and with a larger export potential may be in a more advantageous posishytion Computations show that Russia will suffer the heaviest balance of payments deficit with imports exshyceeding exports by 137 percent of the entire trade turnover including inshyter-regional exchanges This is beshycause products from third countries account for more than halfof all Russhysian imports For comparisons sake the share of import supplies in Ukraine and Byelorus trailing the Russian republic in this respect is twice as small In addition the deficit will to a large extent be due to the cheapness of raw materials exported to other republics

The Central Asian region will end up in an even worse position with the combined balance of payments deficit there equaling -178 percent Ukraine may also suffer a balance of paymen ts deficit of -63 percent due to the high proportion of supplies from other reshypublics in its overall imports Byelorus in contrast will enjoy a surplus of 5 percent as it is overshywhelmingly in the black in inter-reshypublican exchanges Transcaucasian republics will have a surplus of 15 percent for the same reason

The switch to world prices will change things dramatically Russia will be the only republic with a trade surplus (128 percent of the entire turnover) Ukraine and Kazakhstan will be able to slash their deficits but other reshygions will suffer catastrophically Transcaucasian republics will develop balance of paymen ts deficits at a level of -118 percent with Armenia and Georgia the hardest hit The Central sian regions deficit will burgeon to -215 percent The aggregate Baltic deficit will nearly triple to -213 pershycent and the Moldavian deficit will likely swell to -356 percent

No republic will be able to avoid the disastrous effects of such a downturn The changeover will provoke a severe structural crisis in republics around Russia as hundreds of enterprises running on Russian raw material s go broke An unprecedented recession in unemployment may follow with posshysibly up to 40 percent of the workforce in the Baltics losing their jobs

Russia can be expected to achieve a surplus in trade with Georgia quickly within a month-and-a-half after the switch the Baltics in two months the Central Asian region in two-and-ashyhalfmonths and Kazakhstan in threeshyand-a-halfmonths All indications are thatstructural maneuvering will Sl)on give a boost to the Byelorussian and Ukrainian currencies After a brief transitional period their exchange rates may even appreciate against the ruble because the two republics will enjoy a trade surplus with Russia in agricultural products and food

Efficiency Soviet Style ~~

~~ W_~~s~ ~~

~ ~ bullbull From the Souiet weekly Commersant

october 1991 10

Scenario C Transferrable ruble resuscitated

In the volatile situation of price deforshymities and uncertainty about the dishyvision of foreign debt the republics may preserve the Bank for Foreign Economic Activities (Vneshekoshynombank) as the single agency anshyswerable to third countries for the former USSRs state liabilities and to act as the chief manager of governshymentcredits The republics migh t use Vneshekonombank for transferring all account-settling in exportimport activities to republican foreign trade banks Raising prices on fuel power cotton ferrous and non-ferrous metshyals and possibly grain will be a comshypromise whereby raw material-exshyporting regions will not consider their interests infringed upon and raw material importers will not find themshyselves in a critical state Taking their cue from the defunct COMECON reshypublics can sign state contracts among themselves to supply products at prices that will remain stable for stipumiddot lated periods

In this case inter-republican exshychanges under state contracts and direct agreements between entershyprises in different regions can be served by an imaginary currency (a new transferrable ruble) with a stable exchange rate in relation to hard curshyrency The rate most likely will be regulated by an inter-republican agency patterned on COMECONs International Bank for Economic Coshyoperation - effectively a committee consisting of national bank represenshytatives engaged in facilitating intershyrepublican payments Republics may still introduce their own currencies Fluctuations will be determined mostly by the availability of goods in the markets the currency-creation policies of republican banks and the progress of economic reform in the regions Should this scenario materishyalize regions enjoying a surplus in foreign trade will naturally take the dominant positions in the new Intershynational Bank for Economic Cooperashytion

From Will it really work in the Soviet busimiddot ness weekly Commersant The authors Nikita Kirichenko Lyubou Strizhkova and Vera Shirobakoua comprise a research group

Volume 2 Number 9

Transition The Wor1d BankCECSE

Milestones of Transition

In late October Boris Yeltsin anshynounced a program of drastic ecoshynomic reforms for the Russian republic The plan would free prices and remove subsidies by the end of the year privatize large sections of state-owned industry and agriculture and create a more viable currency (Oil products and some consumer staples such as bread are likely to be excluded from the price liberalization) The price move will be preceded by a financial stabilization program deshysigned to mop up some of the bilshylions of eXCESS rubles in circulashytion and cut the former USSRs deficit slash grants to inefficient enterprises cut defense spending stop fundin~~ for about 70 Soviet ministries as of November 1 and end all economic assistance to forshyeign countries Other measures include dealing with newly indeshypendent Soviet republics in hard currency at world prices ending subsidizationjoining oth er repubshylics in a new economic community and providing safety nets for lowshyincome families Yeltsin proposed a new inter-state bank to be creshyated by Russia and the other reshypublics if the latter refrain from issuing their own currencies and agree to a system under which each republics vote would be proshyportionate to its capital If not Russia would form its own state bank and introduce its oVlm curshyrency said Yeltsin addingthathe was ready to head a new governshyment of national unity Inflation has reached a critical level and 55 percent offcimilies were living beshylow the poverty line he stated

The Europnan Bank for Reconshystruction an d Development is conshysidering establishing a new bank to finance trade from Eastern Eushyrope to the Soviet Union EBRD vice-president Ronald Freeman reminded a Paris conference that several East European countries have approached the EBRD for help in expcrtingto the USSR An

EBRD official in London said such a bank could be set up with the help of the World Bank the IMF the OECD and the EC with the EBRD charged with coordinating the new banks acshytivities EBRD President Jacques Attali raised the idea of creating the bank during the World BankllMF Annual Meeting in Bangkok in Octoshyber

Polands president Lech Walesa has hinted that he might appoint former Finance Minister Leszek Balcerowicz as head of the central bank Walesa wants to reorient economic reforms to soften their impact on the population give each Pole stock in privatized state industries intensify job retraining and stimulate local officials to begin auctioning vacant state property in their areas Poland could have as many as 35 million unemployed next year which would be the highest proshyportion of jobless in Europe saidJerzy Eysymont chief of the Polish Planshyning Office If current trends in the Polish economy continue unemployshyment could reach 16 to 18 percent of the workforce

Last year the Soviet Unions budget deficit reached 300 billion rubles or 25 percent of GNP and according to Soviet estimates it will be over 450 billion next year according to the latest figures of the Soviet central statistics office Goskomstat The Soshyviet money supply shot up sharply between June andAugust when up to 20 billion new rubles went into circushylation The state issued an additional 13 billion rubles during September In addition Soviet oil exports are expected to fall to 14 million barrels a day in the first quarter of 1992 half the level of the corresponding period in 1991 Goskomstat has announced that national income the main indishycator of the USSRs economic perforshymance fell 13 percent in the first nine months of 1991 The grain harvest is expected to be down a quarter from lastyears harvest atjust 160 million tons Goskomstat official Igor Pogosov told reporters that a unified financial

and credit policy has effectively broken down and that the repubshylics are pursuing separate and uncoordinated policies

Romanias new prime minister Theodor Stolojan says his top prishyority is to redress the impoverished economy Recent riots cost Romashynias economy almost $3 billion in delayed foreign loans and lost inshyvestment according to Economy Minister Eugen Dijmarescu The cost ofliving has more than tripled in the past 11 months Official figshyures showed that prices soared 2194 percent between October 1990 and October 1991

Germanys five leading economic research institutes report that western Germanys economic growth will slow to 2 percent in 1992 from 35 percent this year but eastern Germanys recovery shywith growth seen at 12 percent in 1992 following a 10 percent conshytraction this year - will expand united Germanys economy by 25 percent in 1992 In their annual economic report the five institutes predicted that the expansion would be uneven however with strong growth in the construction retail and service sectors and continued weakness in heavy industry

Inter-Korean trade has surged in 1991 totaling 124 million dollars in the first eight months asagainst 25 million dollars for the whole of 1990 Currently North Korea is informally seeking participation from South Korea in a possible Speshycial Economic Zone on the border with China and the USSR

The Chinese economy grew 68 pershycent in the first nine months of 1991 compared with the same period last year this makes the rate for the whole year above 6 percent according to Zhang Zhongji spokesman for the State Statistical Bureau The national economy has regained normal growth but some problems and unstable facshy

(continued on page 15)

Volume 2 Number 9 11 October 1991

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

losses d shy_-~o( f r

r r

gt ~ I

~ 07 ~

---

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~

From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

-Transition The World BankCECSE

The two options may actually be phases of the same process Yet neishyther of them provides for preserving an integral hard currency-ruble zone It is possible though that in the first case the ruble will retain the status of a yard-stick in inter-repubshylican exchanges

I n the first case republics less depenshydent on imports from third countries and with a larger export potential may be in a more advantageous posishytion Computations show that Russia will suffer the heaviest balance of payments deficit with imports exshyceeding exports by 137 percent of the entire trade turnover including inshyter-regional exchanges This is beshycause products from third countries account for more than halfof all Russhysian imports For comparisons sake the share of import supplies in Ukraine and Byelorus trailing the Russian republic in this respect is twice as small In addition the deficit will to a large extent be due to the cheapness of raw materials exported to other republics

The Central Asian region will end up in an even worse position with the combined balance of payments deficit there equaling -178 percent Ukraine may also suffer a balance of paymen ts deficit of -63 percent due to the high proportion of supplies from other reshypublics in its overall imports Byelorus in contrast will enjoy a surplus of 5 percent as it is overshywhelmingly in the black in inter-reshypublican exchanges Transcaucasian republics will have a surplus of 15 percent for the same reason

The switch to world prices will change things dramatically Russia will be the only republic with a trade surplus (128 percent of the entire turnover) Ukraine and Kazakhstan will be able to slash their deficits but other reshygions will suffer catastrophically Transcaucasian republics will develop balance of paymen ts deficits at a level of -118 percent with Armenia and Georgia the hardest hit The Central sian regions deficit will burgeon to -215 percent The aggregate Baltic deficit will nearly triple to -213 pershycent and the Moldavian deficit will likely swell to -356 percent

No republic will be able to avoid the disastrous effects of such a downturn The changeover will provoke a severe structural crisis in republics around Russia as hundreds of enterprises running on Russian raw material s go broke An unprecedented recession in unemployment may follow with posshysibly up to 40 percent of the workforce in the Baltics losing their jobs

Russia can be expected to achieve a surplus in trade with Georgia quickly within a month-and-a-half after the switch the Baltics in two months the Central Asian region in two-and-ashyhalfmonths and Kazakhstan in threeshyand-a-halfmonths All indications are thatstructural maneuvering will Sl)on give a boost to the Byelorussian and Ukrainian currencies After a brief transitional period their exchange rates may even appreciate against the ruble because the two republics will enjoy a trade surplus with Russia in agricultural products and food

Efficiency Soviet Style ~~

~~ W_~~s~ ~~

~ ~ bullbull From the Souiet weekly Commersant

october 1991 10

Scenario C Transferrable ruble resuscitated

In the volatile situation of price deforshymities and uncertainty about the dishyvision of foreign debt the republics may preserve the Bank for Foreign Economic Activities (Vneshekoshynombank) as the single agency anshyswerable to third countries for the former USSRs state liabilities and to act as the chief manager of governshymentcredits The republics migh t use Vneshekonombank for transferring all account-settling in exportimport activities to republican foreign trade banks Raising prices on fuel power cotton ferrous and non-ferrous metshyals and possibly grain will be a comshypromise whereby raw material-exshyporting regions will not consider their interests infringed upon and raw material importers will not find themshyselves in a critical state Taking their cue from the defunct COMECON reshypublics can sign state contracts among themselves to supply products at prices that will remain stable for stipumiddot lated periods

In this case inter-republican exshychanges under state contracts and direct agreements between entershyprises in different regions can be served by an imaginary currency (a new transferrable ruble) with a stable exchange rate in relation to hard curshyrency The rate most likely will be regulated by an inter-republican agency patterned on COMECONs International Bank for Economic Coshyoperation - effectively a committee consisting of national bank represenshytatives engaged in facilitating intershyrepublican payments Republics may still introduce their own currencies Fluctuations will be determined mostly by the availability of goods in the markets the currency-creation policies of republican banks and the progress of economic reform in the regions Should this scenario materishyalize regions enjoying a surplus in foreign trade will naturally take the dominant positions in the new Intershynational Bank for Economic Cooperashytion

From Will it really work in the Soviet busimiddot ness weekly Commersant The authors Nikita Kirichenko Lyubou Strizhkova and Vera Shirobakoua comprise a research group

Volume 2 Number 9

Transition The Wor1d BankCECSE

Milestones of Transition

In late October Boris Yeltsin anshynounced a program of drastic ecoshynomic reforms for the Russian republic The plan would free prices and remove subsidies by the end of the year privatize large sections of state-owned industry and agriculture and create a more viable currency (Oil products and some consumer staples such as bread are likely to be excluded from the price liberalization) The price move will be preceded by a financial stabilization program deshysigned to mop up some of the bilshylions of eXCESS rubles in circulashytion and cut the former USSRs deficit slash grants to inefficient enterprises cut defense spending stop fundin~~ for about 70 Soviet ministries as of November 1 and end all economic assistance to forshyeign countries Other measures include dealing with newly indeshypendent Soviet republics in hard currency at world prices ending subsidizationjoining oth er repubshylics in a new economic community and providing safety nets for lowshyincome families Yeltsin proposed a new inter-state bank to be creshyated by Russia and the other reshypublics if the latter refrain from issuing their own currencies and agree to a system under which each republics vote would be proshyportionate to its capital If not Russia would form its own state bank and introduce its oVlm curshyrency said Yeltsin addingthathe was ready to head a new governshyment of national unity Inflation has reached a critical level and 55 percent offcimilies were living beshylow the poverty line he stated

The Europnan Bank for Reconshystruction an d Development is conshysidering establishing a new bank to finance trade from Eastern Eushyrope to the Soviet Union EBRD vice-president Ronald Freeman reminded a Paris conference that several East European countries have approached the EBRD for help in expcrtingto the USSR An

EBRD official in London said such a bank could be set up with the help of the World Bank the IMF the OECD and the EC with the EBRD charged with coordinating the new banks acshytivities EBRD President Jacques Attali raised the idea of creating the bank during the World BankllMF Annual Meeting in Bangkok in Octoshyber

Polands president Lech Walesa has hinted that he might appoint former Finance Minister Leszek Balcerowicz as head of the central bank Walesa wants to reorient economic reforms to soften their impact on the population give each Pole stock in privatized state industries intensify job retraining and stimulate local officials to begin auctioning vacant state property in their areas Poland could have as many as 35 million unemployed next year which would be the highest proshyportion of jobless in Europe saidJerzy Eysymont chief of the Polish Planshyning Office If current trends in the Polish economy continue unemployshyment could reach 16 to 18 percent of the workforce

Last year the Soviet Unions budget deficit reached 300 billion rubles or 25 percent of GNP and according to Soviet estimates it will be over 450 billion next year according to the latest figures of the Soviet central statistics office Goskomstat The Soshyviet money supply shot up sharply between June andAugust when up to 20 billion new rubles went into circushylation The state issued an additional 13 billion rubles during September In addition Soviet oil exports are expected to fall to 14 million barrels a day in the first quarter of 1992 half the level of the corresponding period in 1991 Goskomstat has announced that national income the main indishycator of the USSRs economic perforshymance fell 13 percent in the first nine months of 1991 The grain harvest is expected to be down a quarter from lastyears harvest atjust 160 million tons Goskomstat official Igor Pogosov told reporters that a unified financial

and credit policy has effectively broken down and that the repubshylics are pursuing separate and uncoordinated policies

Romanias new prime minister Theodor Stolojan says his top prishyority is to redress the impoverished economy Recent riots cost Romashynias economy almost $3 billion in delayed foreign loans and lost inshyvestment according to Economy Minister Eugen Dijmarescu The cost ofliving has more than tripled in the past 11 months Official figshyures showed that prices soared 2194 percent between October 1990 and October 1991

Germanys five leading economic research institutes report that western Germanys economic growth will slow to 2 percent in 1992 from 35 percent this year but eastern Germanys recovery shywith growth seen at 12 percent in 1992 following a 10 percent conshytraction this year - will expand united Germanys economy by 25 percent in 1992 In their annual economic report the five institutes predicted that the expansion would be uneven however with strong growth in the construction retail and service sectors and continued weakness in heavy industry

Inter-Korean trade has surged in 1991 totaling 124 million dollars in the first eight months asagainst 25 million dollars for the whole of 1990 Currently North Korea is informally seeking participation from South Korea in a possible Speshycial Economic Zone on the border with China and the USSR

The Chinese economy grew 68 pershycent in the first nine months of 1991 compared with the same period last year this makes the rate for the whole year above 6 percent according to Zhang Zhongji spokesman for the State Statistical Bureau The national economy has regained normal growth but some problems and unstable facshy

(continued on page 15)

Volume 2 Number 9 11 October 1991

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

losses d shy_-~o( f r

r r

gt ~ I

~ 07 ~

---

~Jl ~~

lt ~

Ci ~- ~

~

From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

Transition The Wor1d BankCECSE

Milestones of Transition

In late October Boris Yeltsin anshynounced a program of drastic ecoshynomic reforms for the Russian republic The plan would free prices and remove subsidies by the end of the year privatize large sections of state-owned industry and agriculture and create a more viable currency (Oil products and some consumer staples such as bread are likely to be excluded from the price liberalization) The price move will be preceded by a financial stabilization program deshysigned to mop up some of the bilshylions of eXCESS rubles in circulashytion and cut the former USSRs deficit slash grants to inefficient enterprises cut defense spending stop fundin~~ for about 70 Soviet ministries as of November 1 and end all economic assistance to forshyeign countries Other measures include dealing with newly indeshypendent Soviet republics in hard currency at world prices ending subsidizationjoining oth er repubshylics in a new economic community and providing safety nets for lowshyincome families Yeltsin proposed a new inter-state bank to be creshyated by Russia and the other reshypublics if the latter refrain from issuing their own currencies and agree to a system under which each republics vote would be proshyportionate to its capital If not Russia would form its own state bank and introduce its oVlm curshyrency said Yeltsin addingthathe was ready to head a new governshyment of national unity Inflation has reached a critical level and 55 percent offcimilies were living beshylow the poverty line he stated

The Europnan Bank for Reconshystruction an d Development is conshysidering establishing a new bank to finance trade from Eastern Eushyrope to the Soviet Union EBRD vice-president Ronald Freeman reminded a Paris conference that several East European countries have approached the EBRD for help in expcrtingto the USSR An

EBRD official in London said such a bank could be set up with the help of the World Bank the IMF the OECD and the EC with the EBRD charged with coordinating the new banks acshytivities EBRD President Jacques Attali raised the idea of creating the bank during the World BankllMF Annual Meeting in Bangkok in Octoshyber

Polands president Lech Walesa has hinted that he might appoint former Finance Minister Leszek Balcerowicz as head of the central bank Walesa wants to reorient economic reforms to soften their impact on the population give each Pole stock in privatized state industries intensify job retraining and stimulate local officials to begin auctioning vacant state property in their areas Poland could have as many as 35 million unemployed next year which would be the highest proshyportion of jobless in Europe saidJerzy Eysymont chief of the Polish Planshyning Office If current trends in the Polish economy continue unemployshyment could reach 16 to 18 percent of the workforce

Last year the Soviet Unions budget deficit reached 300 billion rubles or 25 percent of GNP and according to Soviet estimates it will be over 450 billion next year according to the latest figures of the Soviet central statistics office Goskomstat The Soshyviet money supply shot up sharply between June andAugust when up to 20 billion new rubles went into circushylation The state issued an additional 13 billion rubles during September In addition Soviet oil exports are expected to fall to 14 million barrels a day in the first quarter of 1992 half the level of the corresponding period in 1991 Goskomstat has announced that national income the main indishycator of the USSRs economic perforshymance fell 13 percent in the first nine months of 1991 The grain harvest is expected to be down a quarter from lastyears harvest atjust 160 million tons Goskomstat official Igor Pogosov told reporters that a unified financial

and credit policy has effectively broken down and that the repubshylics are pursuing separate and uncoordinated policies

Romanias new prime minister Theodor Stolojan says his top prishyority is to redress the impoverished economy Recent riots cost Romashynias economy almost $3 billion in delayed foreign loans and lost inshyvestment according to Economy Minister Eugen Dijmarescu The cost ofliving has more than tripled in the past 11 months Official figshyures showed that prices soared 2194 percent between October 1990 and October 1991

Germanys five leading economic research institutes report that western Germanys economic growth will slow to 2 percent in 1992 from 35 percent this year but eastern Germanys recovery shywith growth seen at 12 percent in 1992 following a 10 percent conshytraction this year - will expand united Germanys economy by 25 percent in 1992 In their annual economic report the five institutes predicted that the expansion would be uneven however with strong growth in the construction retail and service sectors and continued weakness in heavy industry

Inter-Korean trade has surged in 1991 totaling 124 million dollars in the first eight months asagainst 25 million dollars for the whole of 1990 Currently North Korea is informally seeking participation from South Korea in a possible Speshycial Economic Zone on the border with China and the USSR

The Chinese economy grew 68 pershycent in the first nine months of 1991 compared with the same period last year this makes the rate for the whole year above 6 percent according to Zhang Zhongji spokesman for the State Statistical Bureau The national economy has regained normal growth but some problems and unstable facshy

(continued on page 15)

Volume 2 Number 9 11 October 1991

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

losses d shy_-~o( f r

r r

gt ~ I

~ 07 ~

---

~Jl ~~

lt ~

Ci ~- ~

~

From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

middotmiddot-middot-----~-~middot~~----______u______bull __________

Transition The World BankCECSE

Research Update Labor market dynamics during transition

middot assive displacement of work-e ers and a labor shortage for certain skills will be critical factors in the economic transformashytion of Central and Eastern Europe Therefore reallocatation of labor at the lowest possible social cost will present a major challenge that will require policies and programs responshysive to the changing nature of emshyployment opportunities and to workmiddot ers needs Experience elsewhere demshyonstrates that governments can play a key role in speeding reemployment while cushioning the drop in earnings of the displaced workers

M

To understand better the labor marshyket adjustment now underway in CEE the Socialist Economic Reform Unit of the World Bank has prepared a new research project to answer the following questions bull Which groups of workers are most threatened with unemployment bull What is the likely duration ofpostshydisplacement unemployment bull Which groups of workers become reemployed first and which groups experience the most difficulties in seshycuring new jobs bull How do the earnings of the reemployed compare with tMir previshyous earnings and with the earnings of other workers with similar charactershyistics bull Are there certain groups ofworkers experiencing particularly large wage

losses d shy_-~o( f r

r r

gt ~ I

~ 07 ~

---

~Jl ~~

lt ~

Ci ~- ~

~

From Commersant

The answers will help in assessing the distributive consequences oftranshysition from a command to a market economy and will provide insight about the design of labor market polishycies Some groups of workers (the olderand the less skilled) might expe~ rience special reemployment difficulmiddot ties while others (women minori~ ties) might be particularly vulnerable to job loss over and over In such cases targeted assistance measures might be appropriate particularly training or other reemployment proshygrams Such findings may point to the need for measures to prevent workshyplace discrimination

The project will also investigate the possible adverse effects of unem ployshyment insurance benefits on individushyals behavior as they search for new jobs Such benefits are often viewed as overly generous in socialist counshytries if appropriate the project will propose corrections to existing polishycies It will also explore whether adshyvance notice of job layoffs could influshyence the duration of subsequent unshyemployment and whether wage strucshytures set through collective bargainshying adversely affect labor reallocashytion

The empirical analysis will rely on (i) the estimation of hazard models for analyzing the determinants of labor market transitions and (ii) the estishymation of earnings functions for ana~ lyzing the determinants of displaced workers reemployment earnings

The project will focus on labor market dynamics in the Republic of Slovenia (one of the Yugoslav republics) alshythough the findings should be of more general interest The research focuses on Slovenia because of three factors (i) The economy possesses unusually rich administrative data on the pErrshysonal characteristics and job history of virtually all labor force participants The data are unmatched by anything available for the other Yugoslav reshypublics or other socialist countries (ii) Although Slovenia is a special

12

case among the transforming econoshymies it still has more in common with the other CEE countries than with any Western country notably the dominant social ownership full emshyployment combined with substantial hidden unemployment high female labor force participation a relatively highly educated labor force a heavy concentration of employment in inshydustry low labor mobility an egalishytarian wage structure generous fringe benefits and substantial government involvement in wage determination (iii) Slovenia is currently undergoing large-scale dislocations of the sort that ultimately win be required in all East European countries For example last year the labor force decreased by 5 percent social ~ector employment decreased by 77 percent unemployshyment increased by 62 percent the jobless rate reached 58 percent and the number of layoffs due to plant closures increased more than threeshyfold (To date the rapid rise in Sloven ian unemployment is parallel only to the rates in Poland and Bulshygaria)

Significant differences between Slovenia and the other socialist econoshymies exist however For example Slovenia historically has been more market oriented than most other reshygions of Eastern Europe and it is wealthier But the differences should not be overstated Formidable conshystraints on labor and capital allocashytion have determined the working of the Slovenian economy as in the other socialist economies

The project will be a joint undertakshying of the World Bank and Slovenian counterparts The World Bank team consists of Milan Vodopivec CECSE principal investigator and project manager and Katharine Abraham a professor at the University of Maryshyland at College Park and the princishypal external consultant

For further information contoctMr Vodopiuec World Bank 1818 H St NW Room N-6middot045 Washington DC 20433 Tel (202) 473-6996

Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

Transition The World BankCECSE

Conference Diary

New Initiati-yes in Entrepreneurshyship Development August 19middot22 Kuala Lumpur Malay sia

Organized by the International Labour Organisation the International Cenmiddot ter for Public Enterprises and the Mashylaysian National Institute of Public Administration (lNTAN) Officials from China Czechoslovakia Laos Mongolia Vietnam and Yugoslavia discussed ways to foster entrepreneurshyship suchasself-employmentandmishycroenterprise promotion public sector support to smull businesses spin-off effects offranchising and community based schemes Information Igor F Pavlin ICPE in Developing Cou ntries Titoua 104 P O Box 92 YUmiddot61 j09 Ljubja1W Yugosla via Tel (3861) 182-331 fac (3861) 346middot389

Accounting Aspects of Privashytization September24-26 Geneva Switzerland

Expert Group Meeting of the UN Censhytre of Transnationals sponsored by UNDP Representatives from Ger many Hungary and Czechoslovakia assessed the detciencies in accoun ting that could rel~trict the efficacy of pri vatizstion efforts While estimating the future earni ngpower of enterprises difficulties arise in evaluating the nashytureandextentofmonopolypower the degree of intemational competitiveshyness the patte-n of government polishyciesfor liberalization foreign exchange constraints and the structure of wage negotiations A fortncoming meeting will be devoted ~o the training require ments of accounting

Should the Wflst Lend to the East Lessons from the Developing Countries October 11 London UK

Organized by the Centre for Economic Policy Research Focused on Daniel Cohens recent paper The Solvency of Eastern Europe (CEPR Discussion Pamiddot per No 539) The author (Professor of Economics at the Paris I University) concluded that developing countries that borrowed Ebroad during 1973middot90 experienced lower growth on average than those that did not East European

governments should limit their foreign borrowing Eastern Europe will grow faster than the developing countries beshycause of higher levels of educational at shytainment However even at a potential growth rate of about 4 percent annually it will take 25 years to catch up with Western Europe Of all East European countries Hungary has the greatest per capita debt at $4261 - more than 50 percent higher than the corresponding figures for Bulgaria and Poland Howshyever Hungary is viewed on the secondary marketsas one of Eastern Europes better risks essentially because it has never rescheduled its debt Centre for Economic Policy Research 6 Duke ofYork Street London SWIY 6LA 1 UK Tel (44) (71) 930middot2963

Forthcoming

Privatization and Market Reform in Eastern Europe and the New Soviet Republics November 21middot22 Frankfurt Germany

International forum sponsored by the Wall Street Journal (Europe) for corporate admiddot visers senior decisionmakers and govshyernment officials It will focus on six key issues the role of international advisors working in Eastern Europe funding privatization and infrastructure proshygrams private sources of hard currency funds and the potential for local currency funding the privatization methods of Czechoslovakia Poland and Hungary privatization and market creation in the new Soviet republics and obstacles to privatization environmental andrestitumiddot tion issues and tax treatment of foreign investors Information The Conference Desk in the UK Tel (44) (71) 221middot2291 fac (44) (71) 229middot2636

GlobalEconomicReform Toward the Twenty-First Century November 15 Washington DC

Organized by the US Chamber of Commiddot merce Center for International Private Enterprise (CIPE) The meeting will reshyceive the findings of a 32-country Ecomiddot nomic Reform Survey and will address the question of whether economic reform is compatible with democracy based on country and regional experiences CIPE will launch its new public policy magashyzine Economic Reform Today which premiddot

sentscase studies on how specific counshytries are undertakingeconomicreforms

23rd National Convention of the AAASS November 22-25 Miami FL

Hosted by the Southern Conference on Slavic Studies Highlights include a roundtable discussion on Russia after a year under Boris Yeltsinsleadership and discussions of recent economic changes and reform prospects in the USSR Topics will include Yugoslavia in the 90s Is Latin America the Future of Eastern Europe East Central Eushyrope Today Continuity and Change NEP as a Market Economy Model or Myth Company Laws and Property Rights A Comparative Analysis Beatmiddot ing the System Borrowing Earning and Spending Rubles There will also be a roundtable debate on current Somiddot viet economic development and on demonopolization and international competitiveness in Eastern Europe Information 128 Encino Commons Stanford University Stanford CA 94305middot6029 Tel (415) 723middot9668 fax (415) 725middot7737

Finance and Development in Eushyrope December 13-15 Santiago de Compos tela Spain

Organized by CEPR the conference will synthesize recent advances in fimiddot nancing economic development and apply these insights to the less develmiddot oped areas of Europe The conference will touch on current questions about market vs institutional solutions to the problem ofregional development in Eastern Europe and the potential comshypetition for funds between Southern and Eastern Europe

Impediments to Transition East European Countries and the Polishycies olthe EC January 24middot25 1992 Florence Italy

Sponsored by the European University Institute The conference will focus on the debt overhang trade obstacles payment difficulties investment flows and EC enlargement Information EUI European Policy Unit tel (39) (55) 509-2235 fac (39) (55) 509middot2298

Volume 2 NumbE~ 9 13 October 1991

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

1 III I x

ironsition The Wond BankCECSE

Agen d a (continued from pg 9) Books and Working Papers Briefs

Other actions include financial sushypervision of enterprises that remain under state control promotion offorshyeign investment and creation of a national tax and customs adminisshylrations

IFC-EBRD cooperation in Poland

The Polish Business Advisory Sershyvice (PBAS) has begun a project to assist firms with assets between $1 million and $10 million with financial and technical advice including the preparation of business plans and investment proposals technical advishysory work and general operational support The service is being co-sponmiddot sored by the IFC and the European Ban k for Reconstruction and Develmiddot opment PBAS will have its headshyquarters in Warsaw and will eventushyally create branch offices in other industrial centers It will be funded in part by contributions from IFC EBRD Denmark France the Nethshyerlands Sweden and the United States

Latest member Albania

Albania became the 156th member of the In ternational Monetary Fund and the World Bank on October 16 Albashynia also joined the Banks affiliates the International Development Assoshyelation (IDA) the International Fishynance Corporation (lFC) and the Multilateral Investment Guarantee Agency (MIGA) It is the 140th memo ber oflDA the 143rd member ofIFC and the 85th country to ratify the lIIGA convention

IMF $30 million to Mongolia

The IMF approved a $30 million standby credit to Mongolia to help it through immense economic difficulmiddot ties as it switches from 70 years of communism to capitalism said IMF llanaging Director Michel Camdessus after his recent visit to the country If vlongolia keeps fighting inflation and pushingfree-marketreforms the IMF would advise the world community to continue its support Camdessus added

October 1991

Michael Burawoy and Kathryn Hendley Strategies of Adaptation A Somiddot vietEnterprise underPerestroika and Privatization Berkley-Duke Occasional Papers on the Second Economy in the USSR Paper No 29 Duke University Durham NC 199160 p

The present political and economic uncertainty in the former USSR has multiplied organizational choices within any enterprise The triangle of bureaucratic despotism - the Comshymunist Party the trade union and firms management - has disapshypeared and bargaining with the state has lost its former importance Differshyent interests within an enterprise openly conflict (within the firm beshytween members and non-members of cooperatives and between the labor council and management etc) This significantly determines enterprise strategies The authors base their claims on a two-month case study in Resina a 75-year-old Moscow entershyprise that makes rubber products and has about 3500 employees Information BDOP c10 Kimberly Neuhauser Dept ofEconomics Duke University Durham NC 27706

Karen M Brooks Decollectivization and the Agrishycultural Transition in Eastern and Central Europe The World Bank PRE WP Series No 793 Washington DC 199140 p

Agricultural transition is an essenshytial part of stabilization and adjustshyment in Central and Eastern Europe but the supply response is complishycated by the removal of consumer subsidies and constrained export deshymand Distribution of agricultural land is proceeding in an atmosphere of acute uncertainty and declining farm income Still the state is gradushyally withdrawing as residual claimshyantof positive- and negative-rents for the use of agricultural resources passshying that role to landowners

14

The author - taking into considershyation the significant differences in agricultural policy and farm organishyzation in the individual countries shytranscends those particularities by creating a stylized country in agriculshytural transition She concludes that transition is especially difficult when demand is constrained and the reshymoval of subsidies on feed fertilizer machinery energy and even on credit shifts the terms of trade against agrishyculture particularly against the large livestock sector Needed institutional changes on the supply side would feel an impetus from the growth of proshyductivity which in turn requires a boost in demand This would come from improved export performance or by encouraging domestic demand To order call Cicely Spooner The World Bank tel (202) 473-0464

Manuel Hinds and Gerhard Pohl Going to Market Privatization in Central and Eastern Europe World BankPREWPSeriesNo 768 Washington DC 199122 p

Although large-scale privatization programs for industries in Eastern Europe involve less than is generally perceived - about 10-15 percent of national assets on average and around 25-50 percent of GNP in the individual countries - privatization is a major challenge One dilemma is whether privatization or restructurshying should come first The authors argue that governments should carry out the first stage of restructuring such as a managerial shake-out withshyout making major investments and that the second stage must await full privatization

Enterprise privatization versus bank privatization presents a further diffishyculty in sequencing The banking sysshytem should be split and newly-creshyated private banks should lend tonew private ventures and privatized enshyterprises Old banks should be left to clear up past loans for example they would be responsible for returning non-performing loans to the governshyment in exchange for interest-bear-

Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9

Transition The World BankCECSE

ing government securities The aushythors conclude that although selling New Books and Working Papers enterprises is an efficient way of exshytending the private sector and alshythough it introduces the element of choice for the investors it has drawshybacks such as magnifying the inshyequalities within the society Uncompensated transfers emerge as the most equitable quick and effishycientapproach to privatization in this region claim the authors To order call Luz Hovsepian The World Bank tel (202) 473-7297

Other recent World Bank PRE Working Papclrs

Esra BennathanJeffrey Gutman and Louis Thompson Reforming and Privatizing Hungarys RoadHaulageWPS No 790 October 1H91 28 p Contact Barbara Gregory The World Bank tel (202) 473middot3744

Farid Dhanji and Branko Milanovic Privatization in Easternand Censhytral Europe Objectives Conshystraints and Models of Divesti shyture WPS No 770 Washington DC SeptembElr 1991 2f p Call CEeSE The World Bank tel (202) 473-7188

Andrzej Olech(lwskl Chemicals from Poland A Temshypest in a Telllcup WPS No 784 Washington DC October 199126 p CallNellleArtis The World Bank tel (202) 473-7947

O1eh Havrylyshyn and John Williamson From Soviet DismiddotUnion to Eastmiddot ern Economic Community Policy Analyses in International Economics No 35 Institute for International Ecoshynomics Washington DC 199175 p Order from lIE tel (202) 328-9000

Don Van Atta The Return of Individual Farmshying in the Soviet Union Geonomics Institute Occasional Pashypers Series No2 Middlebury VT October 1991 19 p Information George Bellerose Edishytor Geonomics Institute 14 Hillcrest Avenue Middlebury VT 05753 tel (802) 388-9619 fax (802) 388-9627

Vittorio Corbo FabrizioCorice11i and Jan Bosak (eds) Reforming Central and Eastern European Economies - Initial Results and Challenges The World Bank Washington DC 1991303 p Order World Bank Distribution tel (908) 225middot2165

Ronald I McKinnon The Order of Economic Liberalshyization - Financial Control in the Transition to a Market Economy Johns Hopkins Univershysity Press BaltimoreILondon 1991 200p

The CECSE unit of the World Bank regrets that it is unable to supply the publications listed

Hans Blommestein and Michael Marese Transformation of Planned Economies Property Rights Reshyform and Macroeconomic Stabil shyity Centre for Cooperation with Eushyropean Economies in Transition (CCEET) Paris 1991 126 p Order OECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (3middot31) 4524middot8200

OEeD Economic Survey Hunshygary Centre for Cooperation with European Economies in Transition (CCEET) Paris 1991204 p Order DECD Publications 2 Rue Andre Pascal 75775 Paris Cedex 16 France tel (331) 4524-8200

Kathleen Woody Soviet Banking and Finance Simon andSchuster New York 1991 186 p

George M von Furstenberg Pareto-Optimal Privatization for Gaining Political Support Kredit und Kapital (Berlin) 24 2 147shy175 Tel (0307) 900-060

Joseph Hanlon Mozambique Who Calls the Shots Indiana University Press 1991301 p

Dimitri Demekas et a1 The Romanian EconomicReform Program IMF WP Series No 91180 Washington DC 199152 p

Milestcnes (continued from page 11) tors remain ~6 percent of state entershy and counter the depreciation of the curshy Coupons will be a step toward estabshyprises are rurning at a loss with defishy rency Spending for subsidies had rockshy lishing a Ukrainian currency which is cits in the first three quarters totaling eted from 21 billion dinars in 1987 to 22 forecast for 1993 Ukraines Supreme 20 billion yuan he said Bank loans are billion in 1990 to 498 billion so far this Soviet in late October approved a fiveshygrowing faster than the economy as a year year privatization program as well whole adding to the pressure of pot enshy During the first phase (1992-1993) tial inflation The head of the Ukraine national bank the republican government would sell

V1adimir Matviyenko said Ukraine plans small factories and 200-250 larger enmiddot In October Algerias Commerce Minshy to replace Soviet rubles with couponsas of terprises Private ownership of land ister announced price increases of up 1992 The coupons will be valid for payshy and foreign ownership of property are to 200 percent for staple goods in an ment toward services and will be convertmiddot envisaged attempt to end skyrocketing subsidies ible to an equivalent amount of rubles

Volume 2 Nurr ber 9 15 October 1991

I

Transition The Wood BankCECSE

BIBLIOGRAPHY OF SELECTED ARTICLES

Post Socialist Economies

Standing Guy and Sziraczki Gyorgy (eds) Labour Market Transitions in Eastern Europe and the USSR International Labour Review Internashytional Labour Organi zation No2 Speshycial issue p 137middot274 1991

Rutkowski Michal A Model ofWage Spiral Tragedy Under Repressed Inflation Comparative Economic Studies (US) 33 No2 91-95 Sumshymer 1991

Winiecki Jan Inevitability ofa Fall in Output in the Early Stages of Transition to the Market Theoshyretical underpinnings Soviet Studmiddot ies (UK) 43 No 466976 1991

Central amp Eastern Europe

Auerbach Paul and Stone Merlin Deshyveloping the New Capitalism in Eastern Europe How the West can help LongmiddotRange Planning (UK) 2458middot65 June 1991

Cukor Eszter and Kovan Gyorgy Wage Trends in Hungary Internamiddot tional Labour Review International Labour Organization No 217789 1991

Dont Give Up Now A Survey of Business inEastern EuropeEconoshymist (UK) 320 suppJ p [1]-(32) Sep tember 21-27 1991

Cora Marek ShockTherapy for the PolishLabourMarketInternational

t Labour Review International Labour Organization No 2145-63 1991

Langenfeld James and Blitzer Marsha Is Competition Policy the Last Thing Central and Eastern Europe Need The American Jour naloflnternationalPolicyandLawVol 63347398 Spring 1991

USSR

Arbatov Alexander Political and Ecomiddot nomic Changes in the USSR Energy Implications ETUrgy Journal (US) 12 No 31middot5 1991

Bim A S Socioeconomic Role of the State in the Current Restructuring ofthe Economy Matekon Translations ofRussianand East EuropeanMathe71Ultishycal Economics (US) 2753-69 Summer 1991

Chowdury Arnitahha Soviet Implosion Paves Way for MarketEconomyAsian Finance (Hongkong) 1740-45 110 Sepshytember 15 1991

Gorst Isabel Soviet Union Dont Count on Gas Petroleum Economist (UK) 581819 July 1991

Liefert William M Economic Rent and Estimation of Soviet GNP Growth Review of Income and Wealth (US) 37159-76 June 1991

Rosefielde Steven mUROn ofMaterial ProgressTheAnalyticsofSovietEcomiddot nomic Growth Revisited Soviet Stud ies (UK) 43 No 4597611 1991

Varshavskii A E Problems of Uldng Technical Achievements of the Milishytary in the Civilian Sector of the EconomybullMatekon Translations ofRusmiddot sian and East European Mathematical Economics (US) 27316 Summer 1991

Africa

Campbell Horace Impact of Walter Rodney and Progresive [Progressive] Scholars on the Dar es Salam School Social and Economic Studies (Jamaica) 4099135 June 1991

Gran Thorvald Dilemma betweenMomiddot bilization and Control in Internashytional Aid The Case of the Norwemiddot

gian Sao Hill Sawmill Project in TanzaniaPublic Administration and Development (UK) 11135-48

Kiros Fassil G Economic Conseshyquences ofDrought Crop Failure and Famine inEthiopia 1973-1986 Ambio (Sweden) 20 No 5183middot85 Aumiddot gust 1991

OKeefe P Kirby J and Cherrett 1 MozambicanEnvironmentalProbshylems Myths and Realities Public Administration and Development (UK) 11307-24 July-August 1991

Asia

Cung Raphael Vietnam in the Nineshyties SAlS Review (US) 11179middot97 SummermiddotFall 1991

Ishihara Kyoichi Economic Reform and the Behavior of State Entermiddot prises in China Developing Economiddot mies (Japan) 28[418]42 December 1990

Leung H M et a1 Contractual Reshylations Foreign Debt Investment and Technology Transfer The Case of China Journal of Internamiddot tional Development (UK) 327791 June 1991

Liu Pengning Agricultural Price Reform Problems and SuggesshytionsChiTU8eEconomicStudies(US) 2452middot71 Spring 1991

Latin America

Gibson Bill Nicaraguan Economy in the Medium Run Journal of Interamerican Studies and World Afmiddot fairs (Us) 332351 Summer 1991

Radell Willard W Jr Cuban Sugar ExportDependeney QuestionPremiddot mises and Controversy World Demiddot velopment(UK) 19915middot19July 1991

bull Starr may contact the Joint Bank-Fund Library 202-623middot7054

TRANSITION is a regular publication of the World Banks Socialist Economic Reform Unit The fmdings views and interpretations published in the articles are those of the authors and should not be attributed to the World Bank or its affiliated organizations Nor do any of the interpretations or conclusions necessarily represent official policy of the World Bank or of its Executive Directors or the countries they represent Richard Hirschler is the editor and production manager Desktopping is by S Gerard for the PRE Dissemination Unit To be on the distribution list send name and address to Richard Hirschler Room N-6027 The WorM Bank 1818 H Street NW Washington DC 20433 or call (202) 473-6982 or fax (202) 676middot0439 Infonnation on upcoming conferences on socialist economies indication of subjects of special interest to our readers letters to the editor and any other reader contributions are appreciated

october 1991 16 Volume 2 Number 9