bankruptcy law and enterprise restructuring in central...

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Transition and Macro-Adjustment Division * Policy Research Department * The World Bank

Bankruptcy Law and EnterpriseRestructuring in Central EuropeH ungary, Poland, and the Czech All of these roles serve the underlying ments could not close down all ailing

Republic provide fascinating purpose of imposing financial disci- state-owned firms overnight withoutcomparisons in many areas pline on managers. These same roles risking massive economic, social, and

of economic transformation. Not the are relevant for transforming econo- political disruption. They must con-least of these is bankruptcy law and mies, but the picture is complicated sider the fiscal consequences of large-policy, where the three are taking dif- by the presence of two potential "us- scale labor-shedding. Bankruptcy-ferent approaches. These differences ers": state-owned firms and the pri- related reorganization schemes in ad-reflect in part their varying ap- vate sector. vancedmarketeconomiesworkattheproaches to enterprise restructuring. margin in relatively stable economicBankruptcy cannot be evaluated, es- * For state-owned firms, restructur- environments. Analogous schemes inpecially in these countries, in isola- ing is of prime importance. Many of transforming economies must worktion from other aspects of the trans- these firms need the opportunity to for 30 to 40 percent of the economy information program. shed the legacies of socialism and rapidly changing economic environ-

adjust to the radically shifting incen- ments.Mlultiple Roles tiveframeworks. Postsocialistgovern- * Forthenewlyemergingprivatesec-

in the advanced market economies What's inside.. could function as a bargaining chip inbankruptcy law plays at least three negotiations with the EC. (page 8)important roles: Dead or Alive? Treating

Bankrupt Firms Financial Reform in Russia-TheExit. It provides ailing firms with A recent Warsaw conference or1 en- Rise and Fall of Russian Savings

an orderly means of exit and specifies terprise bankruptcies tried to identify Reform of Russia's finance is crucial torules for dividing remaining assets the best alternatives for financially help the country through its presentamong claimants. distressed state companies in Eastern crises. This article defines the alterna-* Restructuring. It promotes the re- Europe. (page 2) tives. (page 9)structuring of those firms whose "go-ing concern" value exceeds their liq- Where Have All the Dollars Gone? Milestones of Transition (page 13)

uidation value. It may promote such In an interview with Transition, Belarestructuring formally, as under Kadar, Hungary's Minister for Inter- World Bank/IMF Agenda (page 15)Chapter 11 in the United States, or national Economic Relations, talksthrough informal debtor-creditor about the mysterious disappearance of Conference Diary (page 17)workouts in lieu of formal bank- aid dollars, and suggests lifting traderuptcy. barriers. (page 5) New Books and Working Papers* Debt collection. Itpromotes the flow (page 17)

of credit by protecting creditors and Quotation of the Monthserving as a final stage of debt collec- AseniorPolisheconomistsuggeststhat Bibliography of Selected Articlestion. a Central European free trade zone (page 20)

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The World Bank/PRDTM

tor, in contrast, exit and debt collec- because of the failure to differentiate discipline and viable debt collectiontion (to facilitate the flow of credit) between these two potential users and to spur credit to the newly emergingare probably more important than the roles appropriate to each. Should private sector? Are there alternativesrestructuring. This sector more closely a single bankruptcy law apply to both to traditional judicial bankruptcy thatresembles the advanced market econo- state and private firms? Should it could more effectively promote re-mies, where judicial bankruptcy pro- provide for restructuring as well as structuringofloss-makingstatefirms,cedures function satisfactorily be- liquidation, and, if so, what limits especially in light of the weakjudicialcause they operate at the margin. should be placed on each, and what systems in these countries?

links should join the two? Can theSources of Confusion economy afford the massive exit of Addingto this confusion are the mixed

loss-making state firms that could messages emanating from the ad-There has clearly been confusion and result from a tough approach? On the vanced market economies themselves.tension in Central and Eastern Eu- other hand, can it afford a softer ap- The U.S. Chapter 11 reorganizationrope about bankruptcy policy, in part proach given the need for financial provisions are coming under increas-

What to do with Bankrupt Firms?Dilemmas and Recommendations of a Conference

Current restructuring in the post- owned enterprises. The appointment of Out-of-court settlements. Eveninestab-socialist economies requires policy- trustees should be an appropriate re- lished market economies, financial dif-makers to consider atleast three possi- sponse, if there are enough individuals ficultiesareoftensettledbetweencredi-bilities when handling financially qualified for this job. If not, a second-best tors and debtors without resort todistressed companies: conciliation, liq- solution could be the appointment of ad- bankruptcy procedures. This is evenuidation, and exceptional rules for out- ministrators with limited supervisory more justified in the postcommunistof-court settlement. That was the over- roles. Once agreements are made, they economies, where a large number ofwhelming view of a recent conference should be carried out within a specific enterprises are in financial distress andin Poland that focused on enterprise period; two years seems reasonable. the courts are weak. Even permissivebankruptcies (mainly in the Czech Re- conciliation rules might not be suffi-public, Hungary, and Poland) and Liquidation. Liquidation must be as cred- cient, in which case special rules shouldworked out policy proposals. ible a threat as possible in a state-owner- apply temporarily (say, for threeyears).

ship-dominated economy, although liqui- If a firm is ready to change to a corpo-The conference, 'Enterprise Bank- dationproceduresshouldtakeintoaccount rate structure and to present a credibleruptcy in the Emerging Market Econo- the embryonic state of capital markets privatization plan, finance ministriesmies," took place in Warsaw on April and commercial courts. (The credibility of might voluntarily surrender a part of23-24, 1993, under the auspices of the rulesrequiresstrengthening the court sys- the enterprise's tax and social paymentInstitute for EastWest Studies. It was tem,investingin telephone lines and com- arrears. In Poland, for example, com-cosponsored by the Polski Bank puterized data banks, and increasing the mercial banks should take the leadingRozwoju, BankHandlowy, Polski Bank salaries ofjudges.) Furthermore, role in the process by taking equity forKredytowy, and the Polish Bank Asso- unpaid debt. Regulation of bank equityciation. About 60 experts participated, * Rules should be simple, transparent, holding should mirror the Germanprimarily bankers, lawyers, and econo- and easily applicable. model more closely than the Americanmists from the Czech Republic, Ger- * Management should be replaced by model-banks are still the most compe-many, Hungary, Poland, Russia, the court-appointed trustees to eliminate tentintermediariesforfinancialrestruc-United Kingdom, and the United managerial abuse. This is especially im- turing. Still,. caution is in order as ex-States. portant given the large number of state ceptional rules, not to mention

enterprises. unregulated bailing out of enterprises,Conciliation. In the emerging market * Trustees should receive much of their could be harmful in the long run.economies, conciliation(financial agree- compensation after the process has beenment) between the debtorandits credi- successfully completed. Their compensa- Kalman Mizseitors should be given strong preference. tion should be established beforehand as ProgramDirector, Institutefor EastWestThe huge liquidity crunch in the a percentage of the realized liquidation Studies, New Yorkeconomy, a consequence of radical revenue. (From the author's recentpaper, 'Bank-changes in economic direction, and the * Strong incentives (including financial ruptcy and the Post-Communist Econo-collapse ofintraregional trade, mustbe ones) should be established to complete miesofEastCentralEurope,"publishedmitigated without liquidating the bulk the procedurerelativelyquickly. Dragged- by the Institute for EastWest Studies,ofenterprises. Protection ofassets dur- out liquidation procedures have caused New York. Address: 9360 Lexingtoning the negotiations is essential. As- serious bottlenecks in the restructuring Avenue, New York, N.Y 10017, tel. 212-sets are particularly at risk in state- process. 557-2570, fax 212-949-8043.)

2 June 1993

Transilion

ing criticism, with some observers vency. Simplyfrom an administrative beenrelativelyfewformalbankruptcyclaiming that they serve primarily to viewpoint, there are so many problem cases in the courts.protect corporate managers at the cases that courts quicklybecome over-expense ofboth creditors and owners. loaded. Of the 14,300 cases filed in But Poland has recently adopted aMore than 90 percent of Chapter 11 1992, about 40 percent of the reorga- new and innovative law, the Law oncases eventually end in liquidation nization cases (approximately one- Financial Restructuring of Enter-anyway, but after much time and ex- third of which ended in an approved prises and Banks, which envisions apense. Other observers continue to reorganization plan) and a smaller bank-led approach to restructuringsupport the U.S. approach, however, percentage of liquidation cases had loss-making firms. The law applies torightly pointing out that the process been concluded by the end of the year. majority state-owned enterprises withdoesfacilitateworkoutsin some cases, more than 15 billion zlotys in unpaidparticularlyforlargerfirms (for which Delays are common despite the strict debt (or more than 30 percent ofthe long-term survival rate is consid- timetables in the law, in large part debt in arrears). Pursuant to a "con-erably higher). All observers agree due to the shortage ofjudges and quali- ciliation" procedure, a debtor and itsthat the Chapter 11 approach in the fied trustees and liquidators. (In the creditors (led by banks) have fourUnited States could not work without Budapest court there were only eight months to work out a restructuringstrict legal standardsin other, related judges in mid-1992 handling about agreement that can involve debt can-areas, such as contract enforcement, 4,000 cases.) Furthermore, the strict- cellation or rescheduling or debt-accounting, and fiduciary liability- ness ofthe law is a potential economic equityswaps. Ifcreditorsholdingmorestandards that are still in relative "time bomb"; not only will the 10,000 than 50 percent ofthe debtor's obliga-infancy in the transforming econo- completed or pending liquidations tions approve the agreement, it ismies. (generally, of smaller firms) lead to binding on all creditors.

rising unemployment, but if some ofHungary: Judicial Route the approved reorganization plans fail Banks holding problem loans (and

and debtors again go into default benefiting from the ex ante recapital-Hungary is the only Central and East- within three years, these firms (gen- izations also provided in the new law)em European economy pursuing the erally much larger firms) will also be have until March 1994 to handlejudicialbankruptcyrouteaggressively forced to file for liquidation. these loans through either concilia-as aprimary meanstoward enterprise tion procedures, initiation of morediscipline and restructuring. In late Despite their admiration for Hun- formal bankruptcy or liquidation pro-1991 it adopted a strict law that re- gary'sboldsteps,manyobserversnow ceedings under the 1934 laws, orquiresmanagerstofileforbankruptcy see the law as too strict, and there isif a firm is more than ninety days in a move to relax it somewhat-par-default on any debts. ticularly, to omit the requirement of

mandatory filing after ninety days inThe law provides two alternative pro- default and to soften the unanimitycedures-reorganization (mislead- requirementfor reorganization agree-ingly called "bankruptcy") and liqui- ments. On the other hand, some crit-dation. The former gives a debtor's ics doubt the law's ability to forcemanagement sixty days to prepare a appropriaterestructuringat all; a sig-plan to restore solvency, which must nificant number of reorganizationsbe approved unanimously by credi- may fail simply because they do nottors or it automatically becomes a liq- lead to fundamental change.uidation case. The number of bank-ruptcy filings has skyrocketed under Poland: An Alternativethe new law, increasing from 528 in Approach1991 to 14,300 (4,400 as reorganiza-tions and 9,900 as liquidations) in Poland has been less aggressive in its 7 -1992.Anestimatedone-quartertoone- approach to bankruptcy than Hun-third of Hungarian GDP is produced gary. Its judicial bankruptcy proce-by firms that have filed for reorgani- dures are contained in two 1934 laws, s ,.~.

zation or liquidation under the law. the Bankruptcy Act and the Law onMutual Agreement, both revived in

Although Hungary shows admirable 1991. In addition, the 1981 Act on -, -7

resolve, its experience to date demon- State Enterprises (as amended instrates the difficulty of applying the 1991) provides liquidation procedurestraditional solution-judicial bank- for state enterprises. None of these -druptcy proceedings-to the systemic laws contains mandatory triggerproblems of state enterprise insol- mechanisms, and indeed there have From the Hungarian Economic Review(HER)

Volume 4, Number 5 3


sales of the problem loans in the open Hungary is following the traditional countries will continue, to need wprk-market. bankruptcy/reorganization route. Po- able bankruptcy rules for the private

land and the Czech Republic are sector, and over the coming years willThis innovative Polish approach ap- adopting other innovative means- need todevelopsoundproceduresandpears to have many advantages. It whether bank-led 'conciliation" or the judicial expertise to implementavoids overloading the courts, pro-, competitive privatization-to spur the them.vides strit timetables andincentives restructuring of ailing state-ownedfor restructuring, and may spur the firms.All three approaches have their Cheryl W Graybanks to acquire valuable expertise pros and cons; the jury is still out on PRDTM,in credit appraisal and loan recovery what works best. In any case, all the World BankIt is still, too early, however, to judgeits effectiveness in practice.

Attoli's Swift ExitThe Czech Republic:,Playing for Time-: 0 : t fJacques Attali, head of the European lax spending controls at the bank and

Bank for Reconstruction and Develop- faultedAttaliforhispersonalexpenses,The Czech Republic, like Poland, has ment, announced his departure on July accusinghimofbreakingthebank'sownnot :used bankruptcy as a major re-, 16,afterasharplycriticalreportonhis code of conduct. -The EBRD said in astructuring tool. Although it adopted flamboyant management style and the statement thatAttali had stepped downa new law on Bankruptcy and Settle- bank's lavish headquarters. The swift as president "to provide the bank (with)ment in 1991, a.virtual moratorium exit came within hours of the publica-. the opportunity to put this difficult pe-was imposed on claims against st.ate- tion ofan auditors'report that spoke of riod behind it."ownedfirms untilApril 1993. The endof the moratorium was accompaniedby several new protections, such as afurther delay in.its application to cer-tain sectors, such as agriculture, anda 'breathing space" of two months(aftertransferofshares)forfirmsthat-are privatized more than 50 percentthrough vouchers. Thus, the new lawhas scarcely been put into practice.

It can be argued thatthe Czech pri-vatization program is the primary re-structuring tool to date. The programgenerates restructuring ideas.by so-,liciting competing privatizationplans. An average of four plans wereXsubmitted for each company pri-vatized in the first. wave," with somelcompanies attracting up to twentycompeting plans. The moratorium onbankruptcy coincided with this firstwave, presumably on the assumptionthat privatizatio was abetter meansto effective restructuring of both in-dividual firms. and the economy. a;tlarge than judicial bankruptcy pro-;cedures.

Cartoonist, Ingram Pinn (U.K.)In sum, Hungary, Poland, and the'Czech Republic are all actively pur-suing enterprise restructuring,: hop-ing to redress liquidity problems andharden budget constraintswhile keep.-ting as many firms as possible alive. -

throughtthisturbulentperiod.Buttthe.threearedoing itdifferently, andonly

4 June 1993.

Transiflon

Where Have All the Dollars Gone?Hungarian Minister Bela Kadar Queries Foreign-Lenders

T 5 he Center for International A. Systemic change in a country im- A. Af a country wants to carry out sys-Security and Strategic Studies plies a rapid decline in the ability to temic changes, it has to be very care-at Mississippi State Univer- generate income.Aradical cutback-in ful in formulatirng its economic policy,

sity hosted on June 24-25 a work- government subsidies, for ihstance, because political and economic ten-shop on supporting economic devel- will eliminate the less efficient, less sions could aggravate the incomeopment in Central and Eastern competitive enterprises, and even losses, and weaken the driving forcesEurope (see box). In his presentation, entire economic activities. Trade lib- of the transitioh process. Thus, over-Bela Kadar, Hungary's Minister for eralization brings about increased: zealous restrictions-for instance,Intemational Economic Relations, re- foreign competition, which again promising short-term improvementsvealed the gap between aid rhetoric wipes out the inefficient actors in an in the macroeconomic equilibrium-and facts, and analyzed the strengths economy. The insolvency of some East- could undermine the competitivenessand weaknesses of Western financial em European countries-and the of the productive sectors, slow downsupportto postcommunist economies. radical shrinking by 60 to 80 percent' privatization, increase unemploy-Transition editor Richard Hirschler of the earlier COMECON markets- rment, and add indirectly to social andasked Minister Kadar what he meant also implies serious income losses. So political disequilibrium, which, inby updating the famous Marlene it is not surprising that Hungary, af- turn, could endanger not only na-Dietrich lyric, "Where have all the ter having lost 20 percent of its GDP tional security, but also 'subregionalsoldiers gone?" to "Where have all the and even regional security. There-(aid) dollars gone?" ... fore, a proper policy mix is neces-

sary, combining"'Inasterfully the"TIR restrictive and' stimulant ingredi-

Q. The leading industrial nations are X ents of the modernization strategy.busy reassessing their lending poli-cies-their international assistance Q. What is the real weight ofWesternprograms. What are the lessons of aid dollars in the modernization ofexperience ofWestern aid policy after the postsocialist economies?three years of dramatic change inCentral and Eastern Europe? A. The public learns from official

statements that the Western worldA.Comparedwiththeeconomicbreak- has transferred resources on the or-through ofthe Southern European and der of$40 billion to $70 billion so far,East Asian countries, which in the to 'promote'transition in the post-1960s and early 1970s enjoyed aboom- communist countries. One has to ask,ing world economy and a huge influx where have all these billions gone? Inof international capital, the simul- most cases'these data nmerely meantaneous political and economic mod- '" commitments for export credits, in-ernization of Central and Eastern in the past three years, needs exter- vestment guarantees, and commer-Europe began three years ago under - nal resources to restructure and to cial loans. In reality, up to now notextremely adverse external condi- modernize its economy. Its economic, more than '10 to 15 percent of thesetions. The CEE countries, branded as integration into the world requires commitments have been utilized and"scarcity economies," lacked techno- new production and export structures, transferred -to the CEE countries-,logical, financial, and, to a certain and new specialization. All these as- as credits or loans, or as foreign capi-extent, even human resources. Rapid, sume an increase in investment activi- tal investments with expectations ofsuccessful transition therefore as- 'ties, both domestic' and'foreign. In normal returns. There is nothingsumed the removal of trade barriers, other CEE countries, where the de- wrong with that, but it has to be em-improved access to Western markets, cline in GDP was even steeper than phasized that this is not free money,and transfers of external financial, in Hungary, the need is even more but rather business opportunities fortechnological,-and human resources. pressing. the'donors. Genui-iie grants to Hun-So far the transfer' of external re- - gary have never represented moresources has not been substantial. Q. Can you suggest an economic policy than a tiny fraction of its GDP in any

that would attract investment and, givenyear. (Hungary's GDPwill reachQ. Why should the West make extra at the same time, give ample consid- about $40 billion in 1993.)Asubstan-efforts to transfer resources to the eration to the requirement ofbalanced tial part of these grants is used toEast? monetary and fiscal policies? sponsor Western advisers-to finance



the transfer of Western expertise. As mately $250 million annually in Q. Coming back to the criteria of thefor the most important grant contribu- grants from federal, state, and pri- rapid and successful transition-be-tors, the Community's PHARE pro- vate sources... sidesresourcetransfer,youmentionedgram provides roughly $130 million the removal of trade barriers .... Whata year; and the United States, through A. The most important part of the is the situation in that area?the Hungarian-U.S. Enterprise Fund, resource transfer to Hungary is ofhas transferred $48 million between course not grants, but foreign direct A. In a period of protracted global re-1990 and 1993-an average of $16 investments, which haverepresented cession, and bitter election cam-million annually. a steady 4 percent of GDP during the paigns, Western governments are sen-

past three years. Investors, however, sitive to international trade issues,Q. Just for comparison, Mississippi are notbenefactors-theymeanbusi- and the eternal dual between freeState University receives approxi- ness, and rightly so. traders and protectionists has esca-

lated all over the world (see box onpage 7). A small country like Hungary,which is necessarily sensitive to for-Mississippi Is Burning-With a Desire to Help the East eign trade, cannot afford the luxury

Campus Workshop on Aid Policy of applying protectionist policy or re-lying on its tiny domestic market.

In late June, Starkville, Mississippi, a The Committee's recommendations That is why we are so worried aboutsmall town (population 28,000, half of have played an important role in inde- the outcome of the GAIT negotiations.them students) close to Mississippi pendentandjointJapan-U.S.initiatives That is why, at the start of our transi-State University (MSU), became a in the four Central European countries: tion process, we embarked on nego-mecca for high-powered governmentofficials, business representatives, and * Japan set up an Enterprise Facility tiations on European free trade. Ouracademics from Japan, the United (JEF) in May 1992 to promote private association agreement with the ECStates, the Czech Republic, Hungary, sector development in Central Europe. became effective in 1992. The Vise-Poland, and Slovakia. On the uni- It is through this organization that the grad agreement between Hungary,versity'scampus about 130participants Japan International Development Slovakia, the Czech Republic, and Po-reviewedmacroeconomicdevelopments Organization (JAIDO), with $100 mnil- land came into force in March. Andin Central Europe and candidly dis- lion in basic capital, offers direct eq- we hope that the free trade agreementcussed ways to help the region's transi- uity investment for small and medium- with EFTA will be effective before thetion process through coordinated aid size private enterprises in the region. end of 1993. In that case more thanpolicies to increase investment and to For example, JAIDO has cofinanced, 60 percent of the Hungarian indus-facilitatejointprojects.Themeetingwas with the Hungarian American Enter- trial exports will be free from tariffsorganized by the Center for Interna- prise Fund, the construction of a fasttional Security and Strategic Studies food chain in Budapest. And Japan's(CISS) at MSU, and sponsored by the ExIm Bank has provided loans to small IaIways_keep rry passport_Ford Foundation, the Japan-U.S. Foun- and medium-size businesses in the halwys kpn get out if thidation, and the Center for Global Part- region. d e can gotgh! gnership of the Japan Foundation. * A Productivity and Quality Control g

Center will be established in HungaryIt was the fourth meeting of the Japan- and will serve as a model for the wholeU.S. Committee for Promoting Eco- region. \5ljzuInomic and Social Development in * TheOverseasEconomicCooperationCentral and Eastern Europe. The Com- Fund of Japan (OECF) has designatedmittee was established in 1990, with $35 million to clean up a former Sovietthe aim of helping the postcommunist military base in Hungary. The Unitedcountries' emergingprivate sectors, and States and Japan are working on inno- . S.-

supporting investment in agriculture, vative ways of providing additional en- * Lthe food industry, environmental pro- vironmental assistance to Central andtection, and infrastructure. (The Eastern Europe. <founder and director of CISS, Hungar-1ian-born MSU history professor Janos The next meeting of the Japan-U.S.Radvanyi, also played a major role in Committee is slated for early 1994 instarting and organizingtheJapan-U.S. Japan. a

Committee.)From the Hungaran weekly Ludas Matyi

6 June 1993

Transimton

and quantitative restrictions, and 70percent of our total trade will be with EC and Eastern Europe: Not in the Same Leaguepartners that have concluded freetrade agreements with us. The association agreement with the EC EC trade with Eastern Europe

allows ten years for dismantling tradeQ. Is there any intention of develop- barriersforindustrialproducts, andlim- EC deficit transforms into surplusing the Visegrad free trade agreement its Central and Eastern European ex- Ecu billiornsinto a more sophisticated payments ports of "sensitive' products, such as 20

union? steel, agricultural products, chemicals,clothing, and footwear. According to the 1 5 Importslatest EC trade figures-summarized xorts

A. The Visegrad group started as a inarecentarticleintheFinancial7lmnes 'consultation forum; ith'asnowbecame (June 7, 1993)-the combined trade defi-a free trade zone. But it is not an cit of the "Visegrad Four," plus Roma- Salternative to any regional integra- nia and Bulgaria, vis-a-vis the EC in- _tion. Take Hungary, for instance; the creased from Ecu 1.4 billion in 1991 to 1984 1985 1986 1987 1988 1989 1990 1991 199three other Visegrad countries com- Ecu 2.5 billion in 1992. Until 1990 the Note: Trade with Bulgana, the Czech Republic. Hungary,

Romania, Slovakia, and Poland.bined do not buy more than 4 percent region's six economies ran a yearly trade Somei, staa

of Hungarian exports. Maybe in surplus with the EC. Compared withthree to five years this trade will in- 1988, EC exports to the region were upcrease to 6 or 7 percent, but as far as 130 percentin 1992, whileimports were ...despite Eastern Europe's low labor costsI can see, intraregional trade will not up only 82 percent. In the first quarter 1993 manufacturing sector forecast (S per hour)reach a substantial level in the fore- of 1993, Hungarian exports to the EC W. Germany

seeable future. decreased by 25 percent. The twogroups Netherlancsare simplynotin the sameleague: while E. Germany

Q. Could not trade develop between, about 50 percent of the East's trade is Italysay, a Hungarian subsidiary of a with the Community, the share of the SpainFrench company and a Czech subsid- six CEE countries in the Community's Hungary

iary of a U.S. company? exports and imports was only 1.7 per- Czechosi .a'cent last year. At present, per capita Romania

A. We-expect that as a result of the GDP in the countries of the Visegrad Bulgaria 3

free trade agreement more foreign Fourisbetween one-tenth andone-fifth .Average for the Czech Republic and Slovakia.capital investment will flow in, reach- of the EC average. Source: DRI McGraw-Hill, Morgan Stanley research.

ing a much larger subregional, andeven regional, market. Broadeningthe potential for maneuver of for- the states oftheFSUrepresentedonly months at the deathbed of theeign investors is advantageous for a few million dollars, about 0.3 per- COMECON, signed the official docu-the whole region. Again, we must see cent of our annual exports to the suc- ment that liquidated the old organi-clearly the relative importance of cessor states. Some donor countries zation, and have no desire to see itsthe subregional corporation. are now supportingtheir own produc- resurrection. However, there is

ers-forexample,bysubsidizinggrain room to develop regional trade. Cen-Q. For a while "triangular business" exports-thus destroying even more tral European exporters, because ofseemed to be the panacea that could opportunities that the Central Euro- the present liquidity shortage, are notsave at least part of the traditional pean countries might have had in the competitive in markets that expectCOMECON trade, and help both the shrinking Russian markets. sellers to finance their investmentFSU and the CEE economies at the goods, particularly engineering prod-same time. The plan was that West- Q. Russia's share in Hungary's an- ucts. This explains, for instance, theern donors would reimburse Central nual foreign trade is about 10 to 11 rapid drop in machinery exports toEuropean countries for supplies of percent. Withouttryingtorestorethe developing countries, andto the statesfood, consumer goods, and pharma- old compromised-CMEA trading sys- of the FSU. Setting up regional ex-ceutical products to the FSU markets. tem, is there a chance of increasing port creditinstitutions tofinance CEEWhat happened to those ambitious regional trade to a reasonable level by exports could be an important contri-plans? establishing a regional bank? bution to the transition and to the

stimulation of regional trade flows.A. InHungary'scasethetotalvalueof A.As the last chairman of the Execu- Some of those missing aid dollarssuch exports in the past two years to tive Committee, I spent thirteen might then reemerge....

Volume 4. Number 5 7


Quotation of the Month: "A Free TradeoZone CouldStrengthen Bargaining Position with the EC":Senior Polish Economist's Plea to the Visegrad Four -

I n the postcommunist countries of textiles are also subject to severe dis- been liberalized. There arefewerpriceCentral and Eastern Europe, we criminatory"measures in the EC. And disparities, no shortages, andthe statehave seen many situations in theYVisegrad countries certainly dis- no longer maintains a monopoly on

which political considerations-prevail criminate against each other, impos- foreign trade.over economic ones.. Once again po- ing higher customs duties on somelitical considerations are hampering imports from their neighbors than We do face problems, such as unem-the progress of transition in. coun- they do on; many articles imported ployment and the contraction of de-tries that early,this year signed the from the EC. .X mand, unknown in our countriesVisegrad free trade agreement: Po- three years ago. Therefore, all viableland, Hungary, the Czech Republic, All of the Visegrad countries want to solutions should be explored, includ-and Slovakia. Our economies are cur- join the EC. A market-based Central ing increased access to EC markets,rently suffering from a dramatic con- European free trade zone of 64 mil- or, whenever possible, increases intraction of domestic demand exacer- lionpeoplecouldstrengthenourcoun- exports to the newly independentbated by world recession. The major tries' bargaining position in negotia- states of the former Soviet Union; andcommercial partners, Germany and tionswiththeEC;itcouldattractmore promotion of intraregional trade be-the European Community, are adopt- tween the countries of the Visegrading protectionist attitudes, making group.future expansion of our trade more Cooperation and trade betweendifficult. Any form of action that could The free trade zone agreement signedoffset these negative trends ought t enterprises and traders of the by the Visegradcountries last Decem-receive serious consideration. Vi,segrad Four ought, to be con- ber became effective in March 1993.

One option for our countries is to link sidered as normal business It lays out a detailed time frame forOne option for our countries iS to link t ..>.the progressive reduction oftariffs upour economies together in a free trade opportunities to 2001. In the first phase, customszone with increased cross-border co- ' duties will be reduced on "nonsen-operation. However, a number ofpoli- sitive" products only. This includesticians reject this option out of hand. foreign investment and simplify com- mainly, raw materials and semipro-They are either accustomed to look- plex and costly regulations, such as cessed goods that will not jeopardizeing inward or are convinced that for the "rules of origin" procedures. And the markets of the domestic produc-their countries, membership in the it -would put usin a better position to ers. Reduction of duties by 30 percentEC is the only possible solution. adapt our financial sector, customs, on many industrial goods will not be

and trading standards and reg la- achieved until 1995. Liberalization ofFor the foreseeable future, the Com- tions, as well as legal and physical trade in agricultural goods will bemunity will be.preoccupied with inte- infrastructures, to the internal struc- similarly gradual and cautious.grating the EFTA cou:ntries that are tures of the EC.expected to become full-fledged mem- The collapse of trade between thebers in 1995. The Central European Communistauthoritiestypically pro- Visegrad countries has certainly con-economies can hardly expect genuine claimed the virtues of international- tributed to their economic difficulties.progressbefore1996intheirattempts ism while in reality they closely Since these.countries have becometo gain admission. The .temporary watched, or even restricted, direct "almost capitalist" countries, coopera-impasse should encourage* the four cooperation between neighboring tion and trade between enterprisesmembers of the Visegrad group to re- countries. Intraregional cooperation andtradersoftheVisegradFouroughtconsider theireconomic relationsout- was confined to exchanges'of official to be considered as normal businessside the framework of bilateral nego- delegations or folklore groups and to opportunities..tiations with the EC. "COMECONintegration,"prescribed:

by,communist bureaucrats. Excerpts of Krzysztof J. Ners's re-Itisriskyto focusattention ona single cent article, "Free Trade Outside ECmarket,evenifitisasbigamarketas Authorities and the mediapropagated Is a Must, Too," published in thethe EC. This was amply demonstrated theideathattourist-blackmarketeers Prague Post. The author is Directorwhen the Community imposed anti- were at least partially responsible for of the Education Centre on Assis-dumping duties on seamless iron and shortages.. Today, however, our cur- tance to Transition, Warsaw, the In-non-alloy steel pipe from those four rencies are internally convertible, and stitute for EastWest Studies.countries. Agricultural products and our economies, trade, and prices have

8 June 1993

Transitlon

Financial Reform in.Russia: -TheOptions .Enterprises Banking on Their Banks

B esides shifting relative prices* Upgrade the banking infrastru- * The amount of household depositsandambiguouspropertyrights, ture, especially the payments system, outside of Sberbank (Savings Bank)the unstable macroeconomic bankers' training, and supervisory is very small. '

situation in Russia also impedes the capacity. ''' Largeenterprisesareabletormoni-development of the banking sector. * Phaseouttargetedereditprograims tor the lending activities of the banksOutput fell about 15 percent in 1991 supporting'bankrupt state firms.' in which they keep deposits and' areand more than 20 percent in 1992, * Restructure, gradually downsize, shareholders and borrowers.and it has not yet reached rock bot- and even eliminate several of the * Most banks in Russia claim to betom. Inflation was about 90 percent large, specialized banks (such as the pl-ofitable, so it does not make muchin 1991, about 1,500 percent in 1992, Promstroi and Rosselkhoz banks). sense to use scarce public funds toand at a monthly rate of 18 to 22 per- recapitalize them. (The banks' claimcent in the first half of 1993. High Beyond these reforms, what should seems plausible given the presentlyinflation andhighnegativereal inter- the Russian government' do? '- relativelylow-costfuindingin thepres-est rates triggered an abrupt'disinte- ' ence of very high inflation.)gration of the ruble economy. Do Nothing * Even if mostbanks were insolvent,'

recapitalization wouldbe averyriskyFour Options: Pros and Cons Under this scenario the government business; the Central Bank lacks the

abstains from any large-scale finanA capacity to supervise banks and wouldIn the long run Russia's banking cialpolicyreform.Thebanksimprove not be able to prevent the kind of be-shouldmeetthebankingstandardsof their practices gradually and volun- havior;that led to the banks' insol-industrial countries regulated by the tarily, -and the government restrains vency in the first place.Basle Convention. While the strate- itself to promoting the development * The problems of connected andgies discussed here have a horizon of of the banking infrastructure, weed- insider lending need to'be dealt withonly the next three to five years, they ing out the banks' targeted lending by strictly enforcing regulatory re-still need to raise bank standards by program, and restructuring the big strictions-not by attempting a mas-raising minimum capital and estab- specialized banks. Although this ap- sive change in the ownership struc-lishing appropriate capital adequacy proach is unlikely to 'lead to a sus- ture.- It is likely that any attempt tostandards, limiting single borrower tained improvement in the banking change ownership will just reshuffleand connected parties' exposure, and system, it might nonetheless be the same players, as there is no clearsetting accounting, disclosure, and adopted "by default," because it does alternative source of skills and capi-reporting standards. not require any clear decision or ac- tal outside the present managers and

tive role by the authorities. owners.Any reform strategy would need totake into account the following con- Big Bang All this could change-banks mightstraints: ' become insolvent following attempts

Here, the government takes control to stabilize the economy. In this case,* The Russian Central Bank is not of the banks and then initiates their a government-led comprehensive re-yet able to supervise banks,'and its privatizationunderamassiverestru6- structuring 'of the sector might becapacity will improve only gradually turin'g and recapitalization program.-' needed in the future. But such a moveover the next five years. Under the big bang, compliance with now can hardly preempt the possibil-* Closingorrevokingthelicensesof reform strategy would be mandatWry, ity of future problems. Hence aexisting banks is extremely difficult. and change would be abrupt and far- gradual approach seems more appro-

Th-e pool of domestic capital that reaching. This strategy would be jus- priate for Russia's circumstances-could be invested in the banking sys- tified if most banks became insolvent and'it would minimize disruptions totem is limited, and foreign interest in and if large fiscal resources were the economy. While such an approachRussian cross-border-exposure is only needed to bail out bank depositors; will only gradually improve the over-marginal. anotherjustification would be ifbank all soundness-of the banking system* Banking skills are scarce-possi- managers were under-the thunib of and its efficiency in allocating re-bly the single most important con- the enterprises that own the-banks. sources, some degree of gradualismstraint. ' - cannot be':avoided since improve-

Currently in Russia the banking ments in the banking system need toSeveral financial refor-ms are impera- sector's exposure to systemicrisk pre- move in parallel'with the gradualtive regardless of the envisaged over- sents no clear justification for mas- transformation ofthe economy in gen-all reform strategies: sive government intervention: eral.



Piecemeal Phasing-in professionally more skilled, and more single borrower and connected partyclosely supervised than the other exposure. Most of them are expected

Under this approach the government banks. These banks would function to become model banks in no time. Auses a gradual, comprehensive, but as a driving force to induce overall gradual increase in the number ofmandatory approach in requiring that improvement of the banking system. model banks and in their market sharehigher banking standards be applied Other banks would be free to join the could be the main avenue to improv-by all banks. Imposing equal stan- model banks, but once they do, they ing the allocation of resources. Thedards on all banks could prevent the would have to comply with the higher present ownership structure ofbanksemergence of a two-tier banking sys- banking standards, upgrading their could constrain expansion ofthemodeltem; but if the standards were truly operations. To soothe the inevitable banks, however, because many banksrigorous,theycoulddrivealargenum- pain of compliance, model banks may not be able or willing to reduceber ofnoncomplyingbanks out ofbusi- would enjoy privileges over other lending to shareholders. On the otherness. Revokingthe licenses ofall those banks: Central Bank loans under ad- hand, an important catalyst for high-banks would be highly disruptive as vantageous conditions, lower insur- quality expansion would be ifthe Cen-well as politically counterproductive. ance premiums on household savings, tral Bank began to close and liquidateBesides, the Central Bank does not and the like. This option is gradual insolvent-banks and impose losses onhave the capacity to supervise or check and voluntary, and is the least com- depositors. This would probably leadthe standards compliance ofhundreds prehensive of all the alternatives. to a "flight to quality," in other words,or even thousands of banks. a shift of business to high-quality

What would be the likely effect of banks.A Few Good Banks implementing this option? In Russia

about twenty to thirty leading com- Ruben LamdanyIn this case the government gradu- mercial banks are already working Privatization and Enterpriseally creates a separate tier of model on improving theirbalance sheets and Development Divisionbanks, which are better capitalized, banking skills, and reducing their The World Bank

The Rise and Fall of Russian Savings

The Sberbank traditionally raised on a case-by-case basis, are currently more loans may not exceed 75 percent of thehousehold deposits, which were auto- than 100 percent. Due mainly tothe highly total cost.matically channeled to the government negative interest rates, in 1992 depositsto finance its deficit. (It still raises more increased by less than 100 percent, which In 1991, 98 percent of Sberbank's loansthan 90 percent of the total 570 billion implies a steep reduction in their real outstanding were to the government orin household ruble deposits. Its network value. For the same reason, the share of theRussian Central Bank. Lastyeartheof more than 40,000 branches and of- time depositsfellfrom46percentinJanu- banklenttohouseholds(totaloutstand-fices accounts for more than 90 percent ary 1992 to 28 percent in January 1993. ing loans in January 1993: 25 billionof total bank branches.) In the past Enterprise depositsgrewfromalmostzero rubles),enterprises(130billionrubles),.couple ofyears Sberbank's management in 1991 to about 50 billion rubles in Janu- and the interbank market (100 billionhas gained greater independence. Ithas ary 1993, representing almost 10 percent rubles), and the share ofgovernmentas-developed new activities, such as the de- of total deposits. According to a govern- sets in their portfolio fell toless than 50posit base from enterprises, and has ment initiative, interestrates on personal percentbyJanuary 1993. LastApril thebegun lendingtoenterprises and house- savings accounts will triple across the government settledits debt (285 billionholds. Ithashelped create the interbank board, but this measure still awaits par- rubles), which will give Sberbank themarket, where it is the main lender. It liamentary approval. opportunity to greatly expand its lend-has more than 100,000 shareholders, ing operations. Interest rates on loansthe majority of them employees, but its On the asset side, Sberbank has expanded vary, depending on whether the bor-shares are notyet tradable. The Russian its lending to households and enterprises rower is a shareholder or not; for inter-Central Bank is the largest shareholder in the past two years. More than 60 per- bank loans the rate is 130 percent andin Sberbank, and the two banks have centofthis lendingisbyregional branches, 140 percent, respectively. On loans tothe same chairman. which are free to choose borrowers. The enterprises, Sberbank charges 135 per-

head office sets interest rates and defines cent and 145 percent, respectively. In-Interest rates on individuals' savings general loan conditions. For example, terest rates are much lower on loans toaccounts vary from 100 percent to 120 loans are provided 40 percentin cash and households,towhichSberbank-incom-percent, depending on the term and 60 percent in deposits; the combined debt pliance with government and Centralamount of the deposit. Interest rates service of a family may not exceed 30 per- Bank regulations-lends at least 30paid for enterprise deposits, negotiated cent of household income; and housing percent of all new deposits.

10 June 1993

Transi1lon

A Little Russian Bank HistoryFrom Gosbank to Treasury Bond Auctions

U ntil 1987 the SovietUnion had shareholders. The state retains par- rected by the Central Bank and thea monobank system in which tial ownership in many of them. government.the State Bank (Gosbank)

ensured that resources were allocated The other 1,000 banks have been set The other half of bank lending wasin accordance with the government's up since 1990. Their initial sharehold- mostly funded from enterprise de-economic plan. In 1987 Gosbank was ers were state-owned enterprises, co- posits, with only a negligible por-converted into the Soviet Union Cen- operatives, social organizations, and tion coming from household depos-tral Bank, and five specialized banks research academies-entities aware its. Banks are free to set depositwere assigned most of its non-Cen- that through these banks they could andlendingrates.Ingeneral,bankstral Bank functions. Each of the spe- get access to the payments system pay very low interest rates or nocialized banks dealt with specific sec- and manage their cash flow. Over interest at all on current accounts,tors and activities. For example, time some of these banks have begun and enterprises maintain the mini-Agroprombank (Agriculture Bank) to raise deposits and make loans out- mum balances they need for theirprovided credit, depositfacilities, and side of their shareholder circle. Most transactions.paymentservicestothefarmandagro- of the commercial banks are small;industrial sectors. Zhilsotsbank (So- the 65 largestbanks accountfor about Finance Minister Boris Fedorov,cial Investment Bank) providedbank- 70 percent of total assets and loans in Prime MinisterViktor Chernomyr-ingservicesmostlytocertainbranches the system. The five largest banks din and Russian Central Bankof light industry, retail trade, and hold about one-third of total loans in (RCB) Chairman Viktor Gerash-housing construction. Promstroibank the banking system. chenko recently produced a set of(Industry andConstruction Bank) was policy measures cutting credit cre-responsible for serving credit and de- Privatization of the larger banks is ation and government spending.posit needs as well as providing pay- graduallytakingplace inparallel with The RCB will eliminate its directment services to the industrial sector, the privatization of the enterprise credit to enterprises and replace itincludingconstruction, transport, and sector. Initially, all the larger banks with competitive auctions and com-communications. were directly or indirectly owned by mercial bank lending. The mea-

the state. Their shareholders were sures are intended to bring infla-New Commercial Banks almost wholly state-owned enter- tion down to 10 percent a month by

prises or government agencies. This the end of this year.Between 1987 and l991partsofthese is changing quite rapidly as sharesbanks were divested or chose to spin (existingornewissues)arebeingsold TheRCBhelditsfirsttreasurybond-off. This reduced the size ofAgroprom to cooperatives,joint stock companies, auction in mid-May. The face valueand Promstroi banks, and led to the private companies, and private indi- of the non-interest-bearing, three-disintegration of Zhilsotsbank. In viduals,andasthebanks'mainshare- month bonds was 100,000 rubles.1991thespecializedbanksweretrans- holdersbecomejointstockcompanies The bonds were generally sold toformed into joint stock companies, and are themselves privatized. primary brokers at a discount ofchartered to act as universal banks. 16.8 percent, or 83,200 rubles. (In-In 1992 most of the branches of The new ownership structure, in flation is now running at about 20Agroprom, Promstroi, and Sberbank which banks (although private) are percent a month.) The RCB raisedin the Russian territory were reincor- still largely owned by enterprises, 750 million rubles from the salesporated as Russian banks (Agroprom helps perpetuate the practice of con- and reportedly has plans to auctionas Rosselkhozbank). nected and insider lending. It compli- off another 500-600 billion rubles

cates any attempt to stabilize the worth by the year's end. Even then,Since 1988 a large number of new economy and it delays the process of the amount will represent only acommercial banks have emerged, or- restructuring the enterprise sector. small share of the Russian budgetganized as joint stock companies. At deficit.present there are more than 1,700 New Age Lendingindependent commercial banks in (T)rouble-Free Zone?Russia. About 700 of them are spin- During 1992 commercial bank loansoffs of the former Soviet specialized denominated in rubles grew tenfold, Russian attempts to control mon-banks, including most of the larger from about 600 billion to about 6 tril- etary expansion in 1992 were un-banks. Large banks are often owned lion. About 50 percent of these loans dermined by credit expansion else-by hundreds or even thousands of were funded by credit programs di- where in the former Soviet Union.



Purchases in Russiafrom countries of through correspondent accounts at A payments union, financed by west-the FSU surged, with no monetary or the respective central banks. em assistance, has been suggested asreal adjustments to offet the outflow -- amechanism to alleviate these prob-of resources. By.1992, Russia's sur- Theauthoritiesaimedtolimitthesize lems. It would periodically clear, inpluswith theotherFSUstatesrose to of Russia's surpluses with its part- convertible currency, imbalances8.9 percent. relative toits GOP, then, ners.and the corresponding infla- among .the former Soviet republics.in the first three months of 1993, tionary effects-by imposing credit Rather like the European Paymentsdropped to 6.6 percent. ceilings. They also tried to stimulate Union in post-war Western Europe, it

.:cooperationbyvaryingthe credit ceil- could help to maintainmutualtradeSince. 1991, states of theF SU have ing for each state according to the during the transition to convertiblebeen pursuing. idependent,j un- extent of its monetary cooperation currencies, but itis not clear how thiscoordinated, credit -and budgetary with Moscow. Barter, hard currency would reduce the'large andpersistentpolicies, while Russia remained the payment, and settlement in cash imbalance in Russia's favor.only source of ruble .supply. Without rubles continuedas before.,.but rublepolicy coordination, however, mac- bank accounts in different successor (Based partly on reports of Oxford In-roeconoumic stabilization cannot be statestceased to be freely transfer- ternational Ltd., Oxford)achieved in a shared-currency re- rable.gime.The aggregate ifationary ef-fect on the Russian ecowomy-was ex-acerbated by the printing of local, Market forces...supplementary currenci-esin severalstates, alongside the ruble. In thesummer of 1992, the ruble zone beganto break up._ Estonia and Latvia es-tablished their own currencies andsucceeded in stabifixi them. By D MoLE1993, Ukraine and, more recently, - ONE2Kyrgyz-stthave followed.;.

Lastyear Russia delivered moreoiltothe other republics;( -minillion tons)than it did to the rest of the world (66million t . the gglia othernd %thatrate of delivery was 39 percent below1990 levels, adhad fallen morethanRussian oil production.

The present-trade pattr is inhdrited i-from the oldo rder: former Soviet re- .i ..publics process Russian.energy and o R 5ERS HUCH -Wraw materials in a product mix that.inmqst cases can hardlypcompete on.the international maet.The leastdeveloped republics are. exporters ofraw materia.l& mainly to Russia. Onlythose with a.mjor role. in the tran- .Losit of products btween Russia andthe outside. world-notably the Bal-.tic states---have , substantial -com-pensatory. .advantages -outside.e,mer-chandise trade. -. ( BC LE.

Monito~jg Settlements? -;:5.SC\

Ayear agotthe-Russian Central Banksetupa.sy,stem.tomonitor,ru,blesettle-ments betwee aksofRussia and, FromtheHongKongStandard

the other CIS states. Payments go

12 June 1993

Transition

Milestones of Transition

Russian Deputy Prime Minister percent. (The June figure is expected and Tirkmenistan-are4aso preparAleksandrShokhininmid-Juneurged to be around 20 percent.) ingto introducetheir'own currencies.the otherformer- Soviet republics tos.peed up th-e issue. of their national Russia has cut -oil suppl'ies to Uzbekistan- and Kyrgyzstan havecurrencies or to adhere more strictly ULkraine to one-fifth of its already agreed to usethe dollar, not tte ruble,to Russian guidelines on monetary reduced levels because of'okrraine's as the basis for their bilateral inter-policies. He also stated that Russian debt arrears. Govenime'ntnministries bank transactions, though bartercredits to-other former Soviet repub- said Ukraine is receiving 15,000- trade will remain alarge com'ponentlics would be sharply reduced. 20,000 metric tons of oil ar day'in. of econoxaic exchange.' The primeShokhin;.announced that Russia in- stead of the n6rmal .80,000- ministers of thbe two countfies mettends to double prices for natural-gas 100,000 metric tohs. Ukraine- needs in Tashkent-on June 16, and agreedsales to both domestic and CIS cus- 40 million metric-tons of oil annu- to relieve tension between-the twotomers to "not less"than 42,000 rubles ally, of which oiily half Was"expected states over KyrgyzsAtdfis iitroduc-a cubic metet. The domestic price for this year from' Russia-.! -Moscow tion' of its currency, the som;gas is reportedly 15,600 rubles a cu- claims Kiev owes $2.5 billion 'for Uzbekistan had responded by' cut-bic meter. past deliveries, but Ukrainian offi- ting off m.tucf-needed' supplies of

cials dispute this figure.--- -- . natural gas ' and' petroleum toAleksander Makouski, head of the - Kyrgyzstan. Kyrgyzstan-officiallyBelarus National Bank, has rejected Ukraine's budget deficit so'ared sev- ackn-owledged that'it has a debt oftermsunderywhichBelarus couldcon- enfoldin May -following R,ssia's im- $13.3 million to Uzbekistan.tinue to receive Russian4l. es aer positioDdrice increases for gas andJuly 1-namely, to regard-thderuble oil, and strikes in the 'energy sector. Armeniaj Tidikistan, Azerbaijan,as the only legal currency in-Belarus, Ukrainian President Leonid Krav- and Kyrgyzstan, already among theentrust the 'Russian Central Bank , chuk issued a decree on June. 16 cre- poorestCISvd1$lics,hadthelargestwith the power to-regulate credit-and ating an extraordinary committee of GNP-declinen fthe ¢lS in 1992, withicash, match Bela-rus's bankin-g laws 'the Cabinet of Ministers for the 'op- Armenia's econoiy shrinkiiigby 42.6to Russia's, use Russian laws to regu-- erational management" of UTkraine's' percent and Tajikistan's by 31 per-late commercial banks and hard cur- economy. Headed by Prime Minister' cent (compared With 1991). Thes.efig-rency operations, join Russia's inter- ' Leonid.Kauchma,the committee is ureswereiquotedby theVienna-basedbanking system 'and let Russiana.- charged with slowind'inflation, stabi-: Institute for- nternational Economicbodies assume control over the imple- .: lizing production, and, increasing so-' Comparisons,-- in itsf latest 'survey formentation of agreements. cial protection for low-income groups. the -CIS, -published in Die Priesse on

June 15. -AYmenian indu'strial outputMacroeconomic stabilization is still On June25 Lithuania introduced its sank by- 52.5 percent, while Tajiki-lacking in most parts of the foriner new national currency, litast'All ofthe- stan's agricultural output declinedbySoviet Union, according to the re- bills and coins are to be introduced at 45 percent.ufrkmenistansGNPde-cently released annual reportobf-the -one time. Initially, one litaswill-equal' cline of "only" 1Opercent was the bestBank for International Settlements - 10Q'coupons.(Coupons have served. reslt among CI'S state's.Xazakh-(BIS). Stabilization :"will remain be- 'as initerim currency since Lithuania 8tan posted the best results in agri-yond reach as long as republics do not le he ruble zone.)Thechangeoveris' culture, with 'virtually no'decline' ineither switch completely to their own expected to be completed by July.20. productio'n c Dompared with- '1991.currencies or accept the Russian Cen- While thewCaucasus and Cent-ralAsiatral Bank as the sole note-issuing Kyrgyzstan-left the ruble zone and had markedly lorer 'inflati'on ratesauthority," the BIS said. Failure to' introdu:ced its'own currency, the som, than the 6ther tepublics, -this -wasmake headway in this area may- lead in mid-May. However, the som is still mostly due to the fact that-fixedpricesto severe hyperinflation, the.bank not available in sonme rgions of the for many goods have not been lifted.warned. '; coun'try and all enterprises'have not (Geo gia which is not' inthe CIS,

yeti.'eceived the new cu'rrency. The was not included in the statistics.)The rate of Russia's inflation' rose som is slipping'againstboth the dol-slightly in May to 19 percent, bring- '"lar and the ruble.'Theintroduction of The Asian Development Banking the increase for the.fi.rst five the new currency continues to para- (ADB) has agree1'toadmitsl'foimiermonths of 1993 to 164. percent. lyze economic links between Kyrgyz- Soviet republics-the five CentralMonthly inflation rates in 1993 have stan. and its neighbors. In the mean- Asian -states and Aze.baijan-asbeen reported at 27 percent, 25 per- time' three more Central Asian; members. TheADB,ofwhichJapanis-cent, 17 percent, 16 percent, and 19 countries-Kazakhstan, Uzbekistan, the prime shareholder, could comple-



ment funding to these states, which cess. The privatization council intends dampen inflationary pressure, heup to now were provided loans from to sell 30 to 40 percent of all state- added. Because of the healthy infla-the World Bank/IMF and the EBRD. owned companies by the end of 1993, tion picture, the Czech Central Bank

focusing first on small regional busi- cut its discount rate in early June byAfter meeting in Jurmala in early nesses, rather than large firms. In 1.5 percent, bringing the rate to 8June, President Lennart Meri of Es- another development, Slovakiainlate percent.tonia, Latvian Supreme Council June introduced a 20 percent tempo-Chairman Anatolijs Gorbunovs, and rary surcharge above regular import The EBRD has decided to lend Rus-President Algirdas Brazauskas of tariffs. The extra revenue would be sia $174 million to modernize 300 oilLithuania announced that they are used to support the exports of small wells, a project that will be accompa-sending a request to the European and medium-size businesses. nied by technical assistance in theCommunity to admit the three states areas of financial and operationsas associate members. Hungary's parliament, on July 7, management.

has approved a supplementary bud-Bulgaria's economy, reelingfrom the get, revising the deficit from 5.9 per- MembersoftheBlackSeaEconomiceffects ofthe embargo imposed against cent to 6.5 percent of projected GDP Cooperation Organization haverumpYugoslavia, has recorded a trade for 1993. It is aimed at holding the agreed in principle on the distribu-deficit of $260.5 million accumulated deficit to 213 billion forints ($2.2 bil- tion of shares in the Black Sea Tradeduring the first quarter of 1993, com- lion). The parliament also agreed to and Development Bank. Greece, Rus-pared with a surplus of $102 million raise the value added tax (VAT) on a sia, and Turkey will assume a 16.5in the first quarter of 1992. On June wide range of food and other staples percent share in the bank, while Bul-4 the prime rate was adjusted from 51 from 6 percent to 10 percent and 25 garia, Romania, and Ukraine will takepercent to 48 percent, as a response to percent, effective August 1, to provide a 13.5 percent stake. Albania, Arme-a decrease in domestic inflationary part of the funds for the supplemen- nia,Azerbaijan, Georgia, andMoldovapressure over the past months, as well tary budget. (Approved by parliament will contribute only 2 percent each.as to a general drop in interest rates in December, the 1993 budget pro- No agreement could be reached onon international money markets. jected a deficit of 185 billion forints. where to base BSEC's regional bank;

An additional 40 billion forint deficit Bulgaria, Greece, Romania, and Tur-The new official exchange rate in the was set for the Social Security Fund, key have each submitted bids to baserump Yugoslavia is 700,000 dinars which, while formally independent, the bank in their countries.to the German mark and 1.1 million was to be financed through the gov-dinars to the U.S. dollar, which is in ernment). By the end of July, the defi- Poland's unemployment in May to-line with black market rates. Prime cit amounted to 120 billion forints, taled 2,624,000, or 14.2 percent of theMinister Radoje Kontic announced on resulting partly from external pres- total work force (unemploymentJune 16 the latest devaluation of the sures, particularly the recession in dropped by 0.7 percent in comparisoncurrency in an attempt to boost cur- Austria and Germany, Hungary's withApril). Duringthefive months ofrency reserves and combatblack mar- main trading partners. 1993, prices for consumer goods andket exchange rates. This is the sev- services rose by 38.1 percent in com-enth devaluation since April 1992. Foreign investors will sign contracts parison with the first five months ofKontic also introduced a draft federal with Chinese partners worth some 1992. In the first quarter of 1993 thebudget bill that earmarks 75.5 per- $80 billion in 1993, according to Lin number of private companies withcent for the Yugoslav Federal Army. Kun, deputy director offoreign invest- both foreign and domestic capital in-Some 97 percent of the population in ment for China's trade ministry. He creased by several thousand, whileSerbia-Montenegro is living at the also said that China plans further that of state-owned enterprises dimin-povertylevel, accordingto an estimate steps to open its markets to overseas ished from 7,344 at the end of 1992 toby the Belgrade Economic Research investors. 6,838 at the end of the first quarter ofCenter. On average it takes three and 1993. Average industrial productiona half months' salary to purchase the The head of the Czech Central Bank, for the first five months of 1993 wassame amount of goods that could be Josef Tosovsky, said annual inflation 8.8 percenthigher than in the compa-purchased with one month's salary in should fall to around 16 percent by rable period of 1992.early 1990. To buy a Yugo 45 subcom- the end of 1993, from the current ratepact auto now requires ten years and of 21.8 percent. In an interview he In the first six months of 1993, indus-two months of salary compared with said there was an unexpected fiscal trial production in Viet Nam was upnine months of salary in early 1990. surplus in the first three months of 10.2 percent, retail sales 14.7 percent,

1993, as new taxes were paid more exports 17.5 percent, and imports 32Slovak Prime Minister Vladimir promptly than expected. Aclear com- percent, compared with the same pe-Meciarsaidhewillformaspecialcoun- mitment by the government to re- riod in 1992. Monthly inflation hadcil to speed up the privatization pro- strain wage increases had helped been kept low at 0.9 percent.

14 June 1993

Transilion

World Bank/IMF Agenda

Michael Bruno Named World billion as a first credit tranche of the ailing oil industry. The project isBank Chief Economist IMFstand-byarrangement, approved designed to boost annual oil produc-

in August 1992. tion by 12 million tons and earn theWorld Bank President Lewis Preston country an extra $1.5 billion a year.has appointed Michael Bruno, pro- Mongolia: ESAF Loan Goes The loan, the biggest ever made byfessor at the Hebrew University of Forward the World Bank for a single project, isJerusalem, as Vice President, Devel- in addition to an expected $250 mil-opment Economics and Chief Econo- The International MonetaryFundhas lion loan from the EBRD and $6 mil-mist of the World Bank. Bruno, who approved a $30.8 million Enhanced lion from the Netherlands. The Worldholds a Ph.D. in Economics from Structural Adjustment Facility Bank loan is to help pay for repairingStanford University, will assume the (ESAF) credit to Mongolia over three 1,300 oil wells, drilling 84 new wells,position effective September 1. He years. The new loan comes seven constructinga refinery, and replacingserved as the Governor of the Bank of months after the IMF stand-by ar- more than 1,000 kilometers of pipe-Israel from 1986 to 1991, after play- rangement ended. lines. Russian oil production fellfroming a key role in the design of Israel's 570 million tons in 1987 to 396 mil-successful 1985 stabilization program. Shokhin's Shock lion tons in 1992. Three oil producerBruno has been associated with He- associations in Siberia will contrib-brew University since 1963, wherehe Russian Deputy Prime Minister ute $169 million to the project.served as Chairman ofthe Economics Alexander Shokhin has called forDepartment. He has also been a visit- changes in the $43.4 billion aid pack- The IFC Is in the Ringing professor at several universities age agreed on in April 1993 by thein the United States. Bruno, born in Group of Seven. At the World Bank The International Finance Corpora-Germany in 1932, immigrated with Consultative Group meeting on Rus- tion (IFC) has approved $71.5 millionhis family to what is now Israel the sia (June 9, in Paris), Shokhin said in financing for its first two projectsfollowing year. that Russia would not be able to use in Russia. The combined cost of the

half of the approximately $10 billion two projects in the oil and gas sector$1.5 Billion IMF Credit to in bilateral credits included in the is $377 million. (The IFC is the mem-Russia April package unless the terms were ber of the World Bank Group that

softened, interest charges lowered promotes private sector investmentsTheInternationalMonetaryFundhas further, and maturities on credits in developing countries. Russiajoinedapproved a $1.5 billion Systemic extended. He also urged the West to theIFConApril12, 1993.)MostoftheTransformation Facility (STF) credit assumeresponsibility-thatis, setup IFC financing, a$60millionloan, willto Russia to supportthe government's guaranteefunds-forcoveringforeign be provided to the Polar Lights Com-economic and and financial program. suppliers, currently owed an esti- pany to help finance the development(The IMF set up the STF as a tempo- mated $6 billion in arrears payments of the Ardalin oil field in northernrary financial window to provide as- by Russia. He suggested that this Russia. Polar Lights is a 50-50 jointsistance to member countries facing could be financed with part of the G- venture between Conoco Inc. of thebalance of payments difficulties aris- 7 aid package. Further, he said the United States and Arkhangelskgeo-ing from severe disruptions of their aid plan should be reshaped to spur logia, aRussian enterprise. The Polartraditional trade and payments ar- trade among ex-Soviet republics. Lights project will drill developmentrangements.)Another$1.5billion will World Bank Vice President Wilfried wells, establish a treatment facility,be made available, provided that the Thalwitz said that he was "encour- and build a 36-mile pipeline to con-government makes further progress aged by the economic reform program nect with the existing Russian net-in implementing the program. The ofthe Russian government."Thalwitz work. The EBRD, for its part, hasprogram includes reducing the also said that the World Bank would approved a $90 million loan for themonthly inflation rate to less than 10 lend $4 billion for a dozen projects in project, and the U.S. Overseas Pri-percent by the end of the year (from the coming eighteen months. vate Investment Corporation (OPIC)an average monthly rate of 20-25 per- is to lend $50 million.cent in the first half of 1993), halving World Bank Injects $610 Milliontheenlargedgovernmentbudgetdefi- into Russia The IFC will also provide a loan ofcit to 10 percent of Russia's GDP by $10 million to the Vasyugan Serviceslate 1993, further liberalizing the On June 17 the World Bank approved Joint Enterprise and a $1.5 milliontrade and exchange rate system, and a $610 million loan to help Russia's $1 quasi-equity investment to help fi-removing restrictions on land owner- billion program to repair the western nance a project that will increase theship. Russia has already drawn $1 Siberian oil fields and to boost the output of existing oil and gas wells in

Volume 4, Number 5 1S


the Tomsk region of western Siberia. or guarantees to any of its borrowing instt i based in. Helsinki and(Vasyugan Services Joint Enterprise members. owned by the iive Noraic countries.)is a joint venture between Canadian Previously, Lindbaek was presidentFra,craster andtw9oRussa ntities, The -Bankl,Also announced plans to and chief executive officer of Store-Tomskneft Production Association maintain its income-earning capac- brand Insurance Group, Norway'sand asyngan. Production. Divisio. itybyincreasingitstargetfortheratio largest insurance company, and ex-'The company will use modern oil well of reserves to loans to a range of 13 to ecutive vice- president -of Vesta In-fracturing methods that are not yet 14 percent for fiscal 1994 to 1995, surance Group.widel used in Russia to,attain a,sig-, subjectto.atcustoxnaryannualreview.nificant production increase from the The reserves-,to-loansg ratio expected Record World Bank Lendingwells i,t,servkes. Additional fixnanc- for the end offiscal 1993 is about 11.6 for Fiscal 1993ingfor theprojectis it come from the percent. The Bank has an opportu- -

EBRP.)J^- -, -; S , - ; - - - nity now to, build reserves while -con- Commitments by the IBRD and IDAtinuing its practice of waiving, some to the countries of Europe and Cen-

SA-ing China's Grain: $500 - loan charges and transferring, some tral Asia in fiscal 1993, which endedMillion- , a,, < .; , ,i7, 0 ofitsnetincometotheIDAorto.other June 30, totaled $3.8 billion, up

uses approved by the shareholders. sharplyfrom$2.-lbillioninfiscal 1992.To faiunhalfof the $1 billionprogram - - Part of this dramatic increase is at-to, o.verhauAl IChina's grajitransport IDA UpscalingAlbania's,Roads tributable to the first lending com-system, on-June 17,the World Bank: and... mitments-totaling $1.63 billion-torappreye4loa,n of $:325-million and. : - - eight countries:of-the former Sovietthe Internati, ,onal DyelopmentAsso-- Albania's transport sectOr will move Union. Total new commitments (byciation(IDA) m,a.de a ere,dit of $165. toward a more market-based system the World Bank and the, IDA com-*m11ion.About-1 million.,tons of g.rain- with the help of a credit of $18 million bined) to member, countries in the6 percent-ofthe annual grain produc- from the IDA. The project aims to re- samei period totaled a record $23.7tion-is,jost each yeat during Ship7- pair 65kilometers of roads, con,struct billion, according-to preliminary fig-ping fromr production, areas to 16 kilometers of new roads, improve ures published by the.Bank in earlyc6nsumers. Five major grain port ter- road maintenance, and provide spare July. (The comparable figure for fiscal.minalsand laiout60intermediate and, parts and transport equipment. - 1992was $21.7.billion.) Infiscal 1993,300 primary depots will see their fa- IBRD-loan commitments amountedcilities oupgraded. and their stock of ...Tanzania'sPublic Sector to $16.9 billion for 122 projects; IDAequipment increased byy more than credits amounted to $6.8 billion for2,400 bulk rail wagons . and bulk The.IDAhasapprovedacreditof$34.9 123 projects. (The totals for the previ-trucks- By 2000 ,the amocnt-of grain. million for Tanzania, to help imple- ous fiscal year were $15.2 billion formoved in bulk will increase, from, :.thel ment a pu blic, sector restructuring 112 IBRD projects and $6.5 billion forcxrSrent 5-m,illion ton's to 19 mi-lion, program. Thiscreditisforfortyyears, 110 IDA projects.)A gross total of$18tons. As part of the technical assis-, including a ten-year grace period. A billionhasbeendisbursedbytheIBRDtance, wholesale grain markets will further $3.8 million would come from andIDA,compared:with$16.5billiondevelop into futures markets, with theTanzaniangovernment,andother a year earlier.prices detertnined by market forces. donors will contribute $7 million. The

$45.7 million program is to'be c MIGA "First" in ussbia -World Bank Increases Loan--. pleted in 1999.Loss Provisfons The Multilateral Inv'estment Guar-

New Chief of the IFC an'tee Agency-(MIGA) has 'insured itsOn May 20 the World Bank increased first project in Russia. MultiServits accum,lated Provision for, loan World Bank President Lewis Preston Russia, S.A., a company i-corporatedlosses from 2;5 percentto 3 percentof, on June 28-.announced the appoint- in Belgium, has obtained political riskits ioan portfolio. This increase wi-ll: ment of Jannik Lindbaek as Execu- insurance coverage from MIGAforitsresult in an additionral $500, million tive Vice President of the Interna- investment of up -to $11 million inchare to-icometforfiscal 1993,which tional Pinance Corporation (IFC), machinery and equipment for a steelended onri Jge 30. The main, reason effective January. 1, 1994. -Lindkaek- slag processing recovery operation infor the inerease is a deterioration in (54):will succeed Sir William Ryrie, Magnitogorsk,Russia. MIGAhaspro-the dutlook for,collectibiliy of los who has ledAthe IFC since,1984 and vided $9.9 million in insurance toto or guarqanteed: b?y the p Federal is to retire in December. Lindbaek, a MultiServ:Russia against the risk ofRepublic ofeYugoslavia and the Re- Norwegian national,, has been presi- war and civil disturbance for fifteenpub:lic dBos,ia-Heraegozvina, which dent a,ndchiefexecutive,.fficer,ofthe years.- MIGA's .participation hasare -in nonaccrual., The Bank has - Nordi-Irnvestmnent Bank (NIB) since played a critical role in securing fi-ne:ver in:curredan actiAl loss on loans- 1986. (NIB is a m-ultilateral financial nancing for the project.:

16. June 1993

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Conference Diary

Forthcoming Annual Meetings ofithe World Economie Instruments&ftr XAirBank/International 'Monetary Pollution Control

Portfolio Investment in Develop- Fund . October 18-20,1993, LaxeMinVAus-ingCountries:AWorldlBankSym- September 28-30, 1993, -Washington; triaposium D.C.September 9-10, 1993, Washington, Information: Bill Brannigan, the SponsoredbytheInternationalInsti-D.C. World Bank, tel. (202 473:4784. tute :for Aplied Systems Analysis

-(IIAA),Laxenburg, this -conferenceOrganized by the Debt and Interna- World Bank Conference on Envi, will focus on trahsboundaryimpactstional Finance Division of the' World ronmentally Sustaina§ble- Devel- of regional pollutants, such as sulfurBank, this conferenee. will focus on opment . dioxide, which require internationalthe rapid increase in portfolio flows to September 30-October 1, 1993,;Wash- cooperation. Cuieientinternationalne;-severaldevelopingeountries.Thecont ington, D.C. ' gotiations in Europe -recogn-ize theference will discuss the trends in these -- potential contribution of emissionflows, the investor.- (who are. they Under the motto 'Valuing the Envi- tridingi6inv%pvecost-'effetiv6ness,'what are their objectives, what are ronment," the, First Annlual Iiiternm- but institutional' design issues stilltheir constraints), the barriers, the tional ESD Conference will focus on have to be' solVed. Participating ex-various methods.that can be used'.to' three priorities: Environmental Ac- perts from, IESA, -the World 'Bank,monitor investments, the.benefits of counting, Water Resources Manage- the:OECD, the EC, universities, andthose investments from the investor ment, and Follow-up of the Rio Earth environmental agencies will analyzecountries' point' of view (what is the SummitAnviteesincludeAlbertfGre, what can bet ' learnedkI frm `e76oomicevidence on diversification benefits; Vice President of the United States, theory methods, as well as from pract-what are the expected returns if cer- Professor Partha Dasgapta of Cam- tical expefience, on how eeonomic in-tain barriers are removed), and the bridge University, Jacques Cousteau, struments can:be applied for regionalpolicy issues facing developing coun- the Cousteau Foundation, - Nitin pollutants; at both a national 'and antries (are these flowssustainable, are Desai,'UN oCmmissionerforSustain-. intemational level'. Conferees aim to-they.volatile, what micro/macroapoli- able Development, David Pearce, Di- establish -O network of orga'nizations'cies are required to .,attract benefit. rector, Uni-versity. College,; London. andlindividuals -and to identify a re-from these investments). ' Ismail Serageldin, ESD Vice Presi- search agenda, especially fori-furtherInformation, Sudarshan Gooptu or dent,willpresenttheWorldBankview. work atAISA.SStijn Claessens, Debt and Interna- Information:--- Saydeh ''?Shamnas, Information:GerKlaassenorMargrettional Finance Division, the WorMd ESDVP, 'the World Bank,-1818 H Gottsleben, IJASA, A-2361Labenburg,Bank, 1818 H Street, N.W., Washihg- Street, N.W., Room J3-245, 'Wash^' Austrid, te. (43-2236) 71-521, faxf(3-ton, D.C. 20433, tel. (202) 473-3914 or ington, D.C. 20433, teL (202)473:-3772, 2236) 71-31-3473-7212, fax (202)477-0661.: fax (202) 473-3112.

New Books and Working PapersPRDTMregrets that it is unable to supply the;publications listed.

World Bank Publications summary of a box titled "Reform of de'pendency;-ana oor nutrition.-De-the Russian' Health System" (page' spite the large number of doctors and

The World'Bank, World Develop- 164): ' hospitals (relative` to the' 150 million'ment Report 1993:. Investing in inhabitants), life expeetancy in 1990'Health, New York, Oxford Univer- Before the Soviet breakxup,3' 4 per-- for Russian -men was ju<it 64year,sity Press, 1993, 329 p. cent of Russia's GNP was lspent on ten =years-less than in Western' Eu,

health, care, financed- from general rope,and theinfant mortalityrate,atWorld Development Report 1993, the government revenues.' hs 3highly 22'per 1,000i irths, was twice the'sixteenth in this annual series, exam'- centralized and bureaucratic system Western European average.ines the interplay between human led to. inefficiency and' indifference'health,. health policy, and' economic toward quality of care','and'neglect"of Russia's ne ,i Jocra'ticdgdvernmentdevelopment. Ib give ourreaders some preventive measuresto combatindus- is decentralizinghealth financing-and -flavor of the report, the following is a trial pollu'tion, alcohol' andi tbacb managemei&! Medical pfctlee is be-n

Volume 4. Number 5


ing privatized, and under the new burdensome regulations, bad tele- higher than customs dues, turnoverhealth insurance law, each region is phone systems, incompetent bureau- tax, and income tax combined.to have a social insurance fund. A crats, and poor labor. * Seventy percent of businessmennational fund will equalize resources * Regard personal contacts as the have never applied for a loan, due toacross regions. These insurance funds mostfrequent and efficient way to find the high cost and difficulties in meet-will receive a combination of compul- clients. ingthe collateral requirements. None-sory payroll deductions and budget * Consider manufacturing and ser- etheless, two-thirds of the firms weretransfers from general government vice sectors as more profitable than expected to increase their workingrevenues. They will sign contracts for trade. In 1992 private companies and capital and fixed capital.care with public and private provid- businessesyieldedhalfofPoland'seco- * Most private businesses supplieders. Individuals can then voluntarily nomic output, marking a big depar- primarily the local, that is, domesticpurchase supplementary private in- ture from the past four decades of market;theirprimarycompetitorwassurance to cover additional health socialism. the informal (grey) sector, more dan-services. Implementation ofthe health gerous than the state sector, whichinsurance legislation-in effect since To obtain the publications, order provided more than 75 percent of in-late 1991-has been slow. from: World Bank Publications, P.O. dustrial output in 1991.

Box 7247-8619, Philadelphia, PASome important unresolved issues 19170-8619, tel. (202) 473-1155, fax Edmund Pietrzak, The Develop-include: (202)676-0581;orvisitthe World Bank ment of the Capital Market in the* The role and extent of competition bookstores, in the U.S.: 701 18th St. Process of lTansformation ofamong public and private insurers N.W, Washington, D.C.; or in France: Poland's Economy into a Market* Whetherrisksaretoberatedonan 66, avenue d'Iena, 75116 Paris. System: The Period 1989-1992individual basis or across larger pools (June), The Gdansk Institute forof individuals Working Papers of the Gdansk Market Economics, Economic Trans-* How the insurance funds will pay Institute (Poland) formation, Gdansk, No. 20,1992,33 p.providers, on a fee-for-service basis, Information: The Gdansk Instituteforthrough capitation, or by some other Maciej H. Grabowski and Przemyslaw Market Economics, Gdynskichmethod or combination of methods. Kulawczuk, Small and Medium- Kosynierow 11, 80-866 Gdansk,A number of international agencies, Size Enterprises in Poland:Analy- Poland, tel. (4858) 311-816, fax (4858)including the World Bank, are work- sis and PolicyRecommendations, 311-833.ing closely with Russian health offi- The GdanskInstituteforMarketEco-cials on designing and carrying out nomics, Economic Transformation, IMF Working Papershealth policy reforms. Gdansk, No. 25, 1992, 116 p.

Vito Tanzi, Fiscal Policy and theBohdan Wyznikiewicz, Brian Pinto, This survey on the Polish private sec- EconomicRestructuringofEcon-and Maciej Grabowski, Coping with tor was carried outin December, 1991 omies in 1ransition, IMF WP 93/Capitalism: The New Polish En- (thus preceding the above survey by 22, Washington, D.C., 1993, 33 p.trepreneurs, The World Bank, IFC almost a year). Managers from 300Discussion Paper No. 18, 1993, 35 p. small and medium-size businesses in Thebudgetdeficit, calculatedbylook-

the regions of Cracow, Lodz, and ing at the behavior of budgetary rev-Seventy-five Polish entrepreneurs, Gdanskwere interviewed. Highlights: enue and expenditure, has far lessmostly between the ages of36 and 45, * Two-thirds of the small and me- informational value than generallywere interviewed in late 1992-early dium-size businesses were not even assumed if the role of the government1993. Each ran a small-to-medium- three years old. The entrepreneurs has yet to be determined; if the bud-size business, employing from 20 to were well-educated and two-thirds of get mustassume responsibilities now400 people. Sales of the 75 operations them had graduated from universi- carried out by state enterprises; andaveraged $2 million in 1992, with net ties. Most had some experience in if property rights within the publicprofits averaging $100,000. The sur- private business before creatingtheir sector are vague. The true fiscal defi-vey found that many entrepreneurs own firms. cit for the whole public sector-* Have no difficulty with entry and * Cash was still the major means of including the fiscal activities of theexit, or with switching quickly into settlement. More than half of all or- state enterprises and the centralother businesses. ders were executed in cash, as legal bank-may be completely different* Areforcedtousetheirpersonalsav- procedures for collecting receivables from the budget deficit and may evenings and borrowfrom friends and fam- have been time-consuming, working move in a different direction. Con-ily to get their companies off the capital expensive, and the ratio of taining the budget deficit will notground, as local banks refuse to lend overdue receivables extremely high necessarily make more resourcesto untried private clients, who have (often reaching 45 percent of total available to the private sector, and itno security to offer. receivables). Insurance and wage tax might even slow down the structural* Suffer mostly from high taxes and are high-taken together, they are reforms. Fiscalpolicy,however, isvery

18 June 1993

Translilon

relevant. The most comprehensive To order the above IMF publications: legacy, if any, will socialism leave forand economically sound measure of IMF Publication Services, 700-19th the 21st century?the fiscal (not budget) deficit should Street, N.W., Suite C-100, Wash-be the guide to policymaking. Trans- ington, D.C. 20431, tel. (202) Colin Mayer and Xavier Vives, eds.,feroffunctionsfrom state enterprises 623-7430, fax. (202) 623-7201. CapitalMarketsandFinancialIn-to the government will need to be termediation, Cambridge Univer-taken into accountin settinglimitson New Books sity Press for CEPR, Cambridgethe size ofthe deficit. Some other com- (U.K.), 1993.ments of this paper: Michael Keren and Gur Ofer, eds.,* AreductionintaxesrelativetoGDP Trials of Transition-Economic On the future role of banks in financ-in transition economies is almost in- Reform in the Former Commu- ing enterprises, this book concludes:evitable in future years. Taxes'should nist Bloc, Westview Press, Boul- * Technological improvements andbe as simple as possible. "Transplan- der, Colorado, 1992, 308 p. deregulation may pullback the bound-tation" of industrial countries' fiscal aries of bank activity, but there is noinstitutions may lead to costly mis- This is a collection of updated papers question that banks will continue totakes. that were first presented at a 1991 perform a central function in evaluat-* Social expenditure should be Conference on Economic and Social ing and monitoring medium-size andstreamlined and reduced. Public Transformation in Eastern Europe smaller customers.spending probably will fall more and the FSU. The studies compare * Banks will remain a more impor-slowly than public revenue; efficient different reform stages, analyzing tant source of corporate finance thaninstitutionsmustbe developedforthe countries on opposite ends ofthe spec- securities markets: in most countriesmanagement of public expenditure. trum and examining the diverse- only a small segment of the corporate* Ownership rights need to be clari- political, social, and economic- sector has access to bond markets;fled within the public sector. Fail- spheres of reform, and the inter- the maximum size of finance that ising this, fiscal signals sent by those dependencies between them. available from syndicated banks ismost responsible for the budget will well in excess ofthat from Eurobonds;not carry the clear instructions nec- Shlomo Avineri remembers the pre- Eurobonds do not provide the rela-essary for the conduct of an efficient communist era with its frightening tionships with investors that are anfiscal policy. ethnic, national, cultural, and reli- important aspect of bank finance.

gious frictions, now rekindled by the * Control of and by banks is particu-Tamim Bayoumi, Daniel Hewitt, and demise of communism. Silviu Brucan larly crucial in Eastern Europe, whereJerald Schiff, Economic Conse- discusses economic reform and democ- enterprise sectors in most countriesquencesofLowerMilitarySpend- ratization in a Romanian setting. are bankrupt. The role for stock mar-ing. Some SimulationResults, IMF Fabrizio Coricelli and Mario Blejer kets will be limited for several yearsWP 93/17, Washington, D.C., 1993, focus on macroeconomic stabilization to come and, even then, it may be43 p. and the monetary overhang issue. restricted to specific functions, most

Grzegorz Kolodko and Stanislaw notably in the high-technology sec-Hugh Bredenkamp, Conducting Gomulka argue about the Polish "Big tors. Banks will perform a centralMonetary and Credit Policy in Bang," and whether or not it repre- function in the development of theseCountries of the Former Soviet sents an overshooting. Joseph Ber- economies. Once restructured and re-Union: Some Issues and Options, liner, Gur Ofer, Mario Nuti, Marton capitalized (to prevent an inheritedIMF WP 93/23, Washington, D.C., Tardos, and Michael Keren address stock problem from distorting the ef-1993, 23 p. privatization and sequencing at dif- ficient allocation of credit), they will

ferent stages oftransition. The conse- play a central role in enterprise re-Xavier Maret and Gerd Schwartz, quences of trade liberalization and form throughout Eastern Europe.Poland: The Social Safety Net changes in trade patterns are demon-during Transition, IMF WP 93/42, strated, using the (former) East Ger- To order: Cambridge UniversityPress,Washington, D.C., 1993, 39 p. manyasanexample,byKeren,Gunter The Edinburgh Building, Cambridge,

Notzold, Maria Haendcke-Hoppe- CB2 2RU, tel. (44223) 325-970; orPeter J. Montiel and Jonathan D. Arndt; these subjects are discussed CEPR,25-28 OldBurlingtonSt.,Lon-Ostry, RealExchangeRate Target- further by Sandor Richter and Arye don WlX 1LB, tel. (4471) 734-9110,ing in Developing Countries, Hillman. fax (4471) 734-8760.PPAA 93/2, Washington, D.C., 1993,19 p. The book portrays the dynamics of Patrick Artisien, Matija Rojec and

change across Europe, though it seems Marjan Svethcic, eds., Foreign In-Gonzalo Pastor and Amer Bisat, Ar- to come down on the side of caution vestment in Central and Easternmenia: Reform and Growth in and more gradualism. In the opening Europe,St. Martin'sPress, NewYork,Agriculture, PPAA 93/3, Washing- chapter, Joseph Berliner (to whom 1993, 206 p.ton, D.C., 1993, 15 p. the book was dedicated) asks: What



Bibliography of Selected Articles EastEuropeEnergy:LittleCheerStaff may contact the Joint Bank-Fund Library, (202) 623-7054. inBP Report. EastEuropeanMarkets

(U.K.) 13(14):11, 1993.African Economies Russian Central Bank Statute on

Importing and Exporting Foreign EBRD and World Bank ProjectCarnevale, F. Algeria Survey. Project Currency and Securities. Interflo-A Pipeline for Eastern Europe. East-& Trade Finance Magazine (U.K.) Soviet Trade News Monitor (U.S.) 12(7): ern Europe Finance (U.S.) 4(11):2-30,120(April):29-58, 1993. 6-7, 1993. 1993.

Nicholson, M. Oil on Algeria's Russian Far East Oil and Gas Leas- EBRD Meeting: A Special Review.Troubled Waters. The Financial ing Program. Russian Far East Update Euromoney (U.K.) (April):[85]-110,Times (U.K.) July 8, 1993, p. 17. (U.S.) 3(6):8,1993. 1993.

FSU Economies Shama, A., and S. Sementsov. The Col- Erdos, T. Government Budget [inlapse of the Soviet Ministries: Eco- Hungary]: On a Diet. Hungarian Eco-

CISEconomic Union Is Offto Shaky nomic and Legal Transformation. The nomic Review (Hungary) 14 (June):2-7,Start. Current Digest of the Post-So- International Executive (U.S.) 34(2):131- 1993.viet Press (U.S.) 45 (20):8-10, 1993. 50, 1992.

Gacs, J., I.A. Karimov, and C.M.Drebentsov, V. Rebuilding the Ukrainian Economic Monitor: The Schneider. Small-Scale PrivatizationInterrepublic Ties That Once Government's Message to the Popu- in Eastern Europe and Russia: ABound: The CIS Searches for New lation is "Let Them Eat Machines". Historical and Comparative Per-Trading Relationships. Geonomics PlanEcon Report IX, June 10, 1993. spective. Communist Economies and(Geonomics Institute) (5)2:3-5, 1993. Economic Transformation (U.K.) 5(1):

Central and Eastern European 61-86, 1993.Estonia: Looking forBasicAnswers Economiesto Its Telecom Needs. Eastern Euro- Halama, V. Privatization in the Sec-pean Soviet TelecomReport 4(7):10, 1993. Andorka, R. Hungary: Counting the ond Wave: Revisiting the Issue of

Social Cost of Change. World Today Employee Share Participation.Local Budget Finance [in the Rus- (U.K.) 49 (April):77-81, 1993. Privatization Newsletter of the Czechsian Far East]. Russian Far East Up- Republic and Slovakia (Czech Repub-date (U.S.) 7(July):6-7, 1993. Bajsarowicz, J., and T. Zylicz. Environ- lic) 15(April):5-8, 1993.

mental Reform: The Polish Model.Mokhtari, M., and N. Asgary. The The Wall Street Journal (Europe),June 1, Polak, J. Europe: East and West. In-Wealth-Age Relationship Among 1993. ternational Economic Insights (U.S.)the Elderly of the Former Soviet 4(March-April):40-42, 1993.Union. Economic Systems 17(1):1-28, Bulgaria: Finding Its Way. Eastern1993. Information: Springer-Verlag European Soviet Telecom Report(U.S.) 4 Poland. Financial TImes Survey, Fi-New York Inc.,Service Center Secaucus, (6):10, 1993. nancial Times (U.K.), June 17, 1993.44 Hartz Way, Secaucus, New Jersey07094, tel. (201) 348-4033. Ciechocinska, M. Gender Aspects of Telecom Privatization: Eastern

Dismantling the Command Econ- EuropePreparesfortheLeap.East-Russia. Financial Times Survey, Fi- omy in Eastern Europe: The Polish ern European Soviet Telecom Reportnancial Times (U.K.), May 27, 1993. Case. Geoforum (U.K.) 24(1):31-44, 4(5):16-18, 1993.

1993.Russian Central Bank Regulation Vincze, V., and K. Zentai. Franchisingon Sale of Goods and Services for Dempsey, J. Likely to be a Long Haul: in Hungary: A Contribution to theHard Currency in Russia. Interflo- Survey of German Banking and Fi- RevitalisationoftheEconomy.Pub-A Soviet Trade News Monitor (U.S.) nance. The Financial Times (U.K.), July lic Enterprise 13(1-2):25-32, 1993.12(5):3-6, 1993. 1, 1993, p. 14.

TRANSITIONis aregular publication oftheWorldBank's Transition andMacro-Adjustment Division, PolicyResearch Department. The findings,views, and interpretations published inJlhe articles are those of the authors and should not be attributed to the World Bank or its affiliatedorganizations. Nor do any ofthe interpretations or conclusions necessarily represent official policy ofthe WorldBank or of its Executive Directorsor the countries they represent. Richard Hirschler is the editor and production manager; Jennifer Walker is the research assistant. If you wishto receive Transition, send name and address to Richard Hirschler, Room N-11003, The World Bank, 1818 H Street NW, Washington, D.C. 20433or call (202) 473-6982, or fax (202) 676-0439. Information on upcoming conferences on transforming economies, indication of subjects of specialinterest to our readers, letters to the editor, and any other reader contributions are appreciated.

20 June 1993

bankruptcy law and enterprise restructuring in central...

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