Working paper No.58

Comparison between Russia

and Other Economies in Transition

by

Vladimir N. VOLKOV

Deputy Head Macroeconomic Forecasting Department

Ministry of Economics of Russian Federation

February 1998

Department of Research Cooperation Economic Research Institute Economic Planning Agency Tokyo, Japan

Any opinions expressed here are those of the author and not those of the institution to which the author belongs.

－1－

Comparison between Russia and other economies in transition

by Dr. V. Volkov, Deputy Head of Department,

Ministry of Economics of Russian Federation

Not inconsiderable experience of transformation of centralized planning

economic system into the market economy has been accumulated in the past 6 or

8 years: about thirty states of East Europe and ex-USSR are undergoing the

period of post-Socialist development.

Changes the economies of these countries underwent in a relatively short

period are impressive indeed. Prices and foreign trade are liberalized.

Considerable share of the produce is generated in the private sector. Market

institutions (exchanges, business banks, currency and stock markets, laws on

bankruptcy, anti-monopolistic regulations) are set up and develop. The chronic

deficit of goods and services has receded to the past.

At the same time the transformation which is going on is a painful

experience, its economic and social costs are quite great. These costs revealed

themselves, first and foremost, in the deep and prolonged economic recession,

destruction of the social guarantees system people were accustomed to, the

increase of population incomes and well-being differentiation, and, in the larger

part of the countries, in increasing political tensions.

Sure, within the limits of the present study it is impossible to characterize

even the principal results of various transitional economies countries development

in the past years, to say nothing of peculiarities of this development. A more

specific aim is raised: to analyze other countries transformational experience

which may be useful for the further reforming of the Russian economy with

Russia’s own experience and results of reforms achieved by Russia taken into

account. From this point of view it seems expedient to focus the attention on East

European countries experiences (with no discussion of the CIS countries

experiences), first of all Poland, Czech Republic and Hungary’s experience. In

doing so the attention will be focused on the most “painful” points of the Russian

economy which undergoes reforming. Firstly, the countries mentioned made a

－2－

greater progress along the path of reforms than Russia did (including a formation

of market institutions to be necessary). These countries have succeeded in

overcoming the economic recession and passed to the stage of revival. Russia still

has to follow their suit. Secondly, these states have rather large scale and

structurally representative economies (though certainly no East European country

is comparable with Russia as regards scale and structure of economy).

There are a number of significant differences of conditions of reforms that

go on in the Russian economy and in economies of the countries mentioned

above. In particular, these differences are results of different conditions that

existed at the beginning of reforms. Partially these differences at the starting

point were determined by factors that were being accumulated for many years:

East European countries economies were not subject to the command

administrative system dominance for so long period as the ex-USSR economy

was. Important market economy elements, first of all private property were active

in East European countries to a greater extent (or, as in Poland, to by a far more

greater extent) than in the USSR. Due primarily to the hypertrophied

development of the military-industrial complex the Soviet and Russian economies

had a by far more overloaded structure while their consumer sectors were weak.

Other differences (also unfavorable for Russia) are related to factors that started

to act on the eve of reforms’ beginning: disintegration of the USSR which

resulted in emergence of independent states that previously had been

economically integrated to a very great extent (this factor was absent in Poland

and Hungary while disintegration of Czechoslovakia was more painful for

Slovakia and less so for Czech Republic); the political instability in Russia, lack

of consensus on mainstream ways and directions of reform in the society as a

whole and in the elite (that was the particular difference of Russia from Czech

Republic and Hungary). However, in comparison with East European countries

Russia has a number of advantages, first and foremost, the enormous resources

and export potential which could ameliorate the transition period difficulties.

Due to the differences enumerated above it is senseless for Russia to

emulate reforms made elsewhere including reforms carried out in the East

－3－

European countries (one should note that these countries’ experiences are

ambiguous, rich with peculiarities inherent to individual countries). At the same

time a series of lessons derived from the reforms carried out in these countries

and specific instruments developed in the course of reforms in these countries

seem to be useful for Russia, of course, with the Russian peculiarities taken into

due account. Let us consider them in a more detailed way.

The first lesson consists in the necessity to overcome simplified notions

about the transitional period. The most unexpected phenomenon for the East

European countries was a major scale (comparable to the Great Depression of

1929 － 1933) downfall which manifested itself in reduction of production and

employment to levels that were by far more lower than the pre-reform period levels.

Even in Czech Republic, Poland and Hungary (these countries achieved the best results in the economic recession overcoming － see Table 1) the reality proved to

be more complicated than the suppositions and expectations: initially, it was

expected that the positive aspects of reforms would reveal themselves quite soon

and the economic growth would be resumed after a brief adaptation period. Thus, in 1990 the Polish government predicted the decrease of GDP would be mere 3 －

5% and a recovery would come already in the second half of 1990. Even in 1991,

when the Polish economy was rapidly falling down in a spiral, the government

nevertheless predicted the GDP would grow by 3.5% for the whole year. The

prediction happened to be absolutely unrealistic ( actually, the economic decrease

was 7.0%). The Hungarian government entertained itself and the public with

overoptimistic predictions for 1991 and 1992: instead of the promised annual

decrease of GDP by 2－3% the real decrease was 12% and 3% respectively. At the

beginning of the market reforms in Czechoslovakia in 1991 the government

anticipated decrease of GDP within 5 to 10% range. However in 1991 the

decrease in Czech Republic was 14% and in 1992 it was over 6% (the indices for Slovakia were about the same) － see /2/.

Expectations of the people were even less realistic. Due to the

demonstration effect of the abundance market economy countries enjoyed the

massive (and just) criticism of the planned economy inefficiency found a broad

－4－

response. That resulted in the spread of opinion that substitution of one economic

system for another was a rather simple and easy undertaking and that such

transition would bring about the economic prosperity and a considerable

improvement of East European countries population standards of living virtually

immediately. The reality was a far cry from these rosy scenarios.

Similar, often simplified notions about the course of reforms and ways

leading to the economic crisis overcoming as well as the underestimation of

difficulties reformers had to confront later on were among the negative

circumstances in Russia too. That was quite typical attitude at the initial stage of

reform but this attitude is still not overcome.

For example, a rapid achievement of macroeconomic stabilization and a

rapid creation of prerequisites for stable and sound, sustainable economic growth

in Russia were declared at the top level as the viable and realistic options. Later

the solution of the task was transferred to the government’s program for 1993

－ 1995 and it was not solved again.

At the same time for long the attention was focused exclusively on the

inflation. Sure, it is one of the most important aspects of stabilization. The

experience of other countries demonstrates that unless 40% barrier of the

inflation rate is not overcome one cannot speak of investments into the real sector

and, consequently, of stable economic growth. The barrier mentioned was

overcome in 1996 (see Table 2) but the investment activity and economic growth

did not resume. Then expectations were shifted to the sphere of interest rates. It

was expected that the economic revival would begin as soon as interest rates

would go down to a level comparable with profitability of projects realized in the

real sector. That is, of course, no less important than suppression of inflation.

(By the way, in 1997 trends observed on the financial markets and, first of all,

dynamics of the state securities profitability which determines the situation on

these markets in Russia were rather propitious. By the end of September, 1997,

the profitability of the state short-term bonds and the Federal loan bonds at the

secondary market went down to annual 18% and 40% respectively while on the

－5－

eve of the Presidential election they exceeded annual 170% on state short-term

bonds and 460% on the Federal loan bonds).

However even that does not exhaust the problem’s complicate. One may

think that even when the necessary barrier of the interest rates is overcome (that

achievement seems to be within the reach) investments to manufacturing sector

do not come automatically. To say nothing of the fact that most of business banks

simply do not possess long-term liabilities as yet the most important problem to

be solved in this respect is the issue of reliability of return of the means banks and

other financial institutions lend to the production. Another key issue connected

with the first one is whether enterprises are able to deal with loans if these are

provided or not. The experience of countries with the transitional economies

demonstrates that in order to give the affirmative answer to these questions it is

necessary to carry out a serious work at the micro-level of reforms which will be

discussed below.

Another lesson consists of preferability of successive and decisive

actions during the period of transition and, first of all, in macroeconomics

and stabilization policies carrying out. The analysis shows that the countries

that successively carried out transformations, step by step actions aimed at

realization of stabilization policies achieved better results in overcoming the crisis

of transformation (as Poland, Czech Republic, Slovenia, Latvia, Estonia, some

other states did). However, consistency is not identical to a rapidity of actions,

and more to thoughtless actions. Consistency of transformations is not a

competition in rapidity. It can be confirmed by an experience of Hungary which

followed the evolutionist strategy but overcame the crisis successfully too.

Particularly, it draws somebody’s attention to the sequence of price liberalization

in this country, in connection with the extent of liberalization of foreign trade.

The main point is that the market reforms and stabilization policy were carried

out in Hungary in a rather consistent way which led to real results.

On the contrary, the countries where governments carried out hesitant

changes, inconsistent, vacillating macroeconomic policies (as governments did in

Bulgaria and most of CIS countries), permanently reproduced problems that had

－6－

been solved by the countries of the first group and have not coped with the task

of macroeconomic stabilization and the slump overcoming.

Lack of consistency in implementation of reforming policies in general (and

stabilization policies in particular) was characteristic of Russia too. Thus, period

of strict financial and monetary and credit policies (early 1992, the second half of

1993 and early 1994) were changed for periods of these policies amelioration (the

second half of 1992 and early 1993, mid-1994). As result of these vacillations

trend of inflation rate decrease every time was changed for the opposite one

(although production decline became every time not so deep) and the first two

attempts to achieve the macroeconomic stabilization failed.

The lesson is meaningful for Russia now too. Imposition of a more strict

control of the monetary aggregate increment and the budget deficit in the second

half of 1996 and in 1997 and policies of formation of prices for the natural

monopolies’ production predetermined the lowering rates of inflation in January -

October of 1997 (less than 1% per month) and continuation of the positive trend

which revealed itself in 1996. At the same time it is necessary to take into

consideration large scale arrears of salaries, wages and social transfers as well as

the structure of population expenditures not inconsiderable share thereof is spent

for purchases of foreign currency (though a part of the foreign currency purchased

is used by “shuttles” and other individuals who go abroad). It is the evidence of

the fact that a potential for inflation is preserved in the economy and it requires a

consistent continuation of anti-inflationary measures.

At the same time, recently a number of Russian politicians and economists

have expressed the opinion that there was a shortage of the ruble supply and that the emission was needed. It should be noted in this respect that in 1996 － 1997

the dominant tendency was that of the nominal monetary aggregate dynamics

outstripped the inflation dynamics, i.e. the real monetary aggregate was growing.

Thereby the “monetary aggregate to GDP” ratio which, if compared with the

economically developed countries or even with East European countries, is very

low in Russia indeed is gradually increasing. However excessive invigoration of

the process is dangerous for the very process is based on the progressive

－7－

lowering of inflationist expectations of economic agents and increasing demand

for rubles, i.e. on a trend which can be easily disturbed in Russia but, as the

practical experience demonstrates, is very difficult to restore.

The next lesson consists of necessity to devote a greater attention to

micro-level of reforms and to carry out a meticulous work in that sphere.

Though programmes of reforms included a set of microeconomic policies, first of

all the privatization, efficiency of these policies in the majority of countries with a

transitional economies at the initial stage of reforms proved to be low. In many

instances there was a sheer lack of an adequate legal base for formation of market

institutions (until 1992 － 1994 many East European countries used some

economic laws of the pre-World War 2 period: for example, in Poland the

business code of 1934 was applied). Meanwhile it was supposed that a vigorous

launching of market mechanisms, increasing efficiency and activities of private

enterprises would have to offset the curtailment of inefficient productions rapidly

and to ensure a recovery of economies. However in reality adaptation of the real

sector enterprises to the new conditions proved to be very sluggish. In fact, high

rates of privatization (in some countries non-state sector share in GDP exceeded

50% as early as in 1993) ensured just a formal change of owners and at the first

stage did not brought about a direct economic effect: enterprises were either in a

deep investment crisis or were still dependent on the budget subsidies.

Meanwhile no improvement of production efficiency indices occurred: for

example, from 1990 to 1994 the employment decreased in parallel with the

reduction of production only in Poland and Bulgaria which meant a stabilization

of labor productivity. In other countries this index even deteriorated － see /2/. At

the initial stage of reforms the due priority was not attached to the banking sector

restructuring. In result of that banks and enterprises proved to be incapable to

respond properly to drastic changes of macroeconomic situation. Whatever is said

above manifested itself in a particulaly vivid and bold way in the course of the

Russian economy reforming.

Among the major deficiencies of the Russian reforms results one should

point out that necessary changes are lagging behind precisely at the micro-level,

－8－

systemic market transformation are incomplete and the state institutionalized

policies are weak. All of these resulted in the fact that so far financial resources

of economic agents and those of the state have not been separated.

Thus, if one speaks about enterprises of the real sector then it should be

noted that majority of these enterprises still do not function as subjects of the

normal market. Some of these enterprises survive by virtue of subsidies, various

privileges including tax exemptions. Some enterprises have learnt to exist under

conditions of non-payments and use of money substitutes. In general and

essentially enterprises do not pay for their financial liabilities. As a result of that

the economy is functioning under conditions of an avalanche-like increase of

number of enterprises that function with losses. By the end of 1996 number of

such enterprises in industry comprised 43% of the total number against 26.4% at

the end of 1996. In agriculture those indices were 74.5% and 55% respectively

According to results of 1996 whole branches including forestry, wood-working

and wood pulp and paper, coal, light industries and agriculture worked with

losses. Financial difficulties of enterprises has not been overcome in 1997.

Or we may choose banks and other financial institutions. Strange as it may

seem, but their financial well-being is to a great extent connected with the state

finance, first of all through the state bonds mechanism. For example, by the end

of 1996 the ratio of the nominal volume of the state bonds issues that were

circulating at the market to GDP increased from 16% to 25% (with terms of

maturity taken into account). In early 1997 this trend of domestic debt growth

went on. However the situation which emerged in this sphere cannot last forever.

It is quite understandable if we look at the following figures. If in the first half of

1996 the budgetary efficiency of the state bonds, i.e., ratio of the total amount of

means drawn to the budget from the market to the aggregate proceeds from sale

of the state bonds, was 17% then by fall of the same year the ratio nearly

approached 0 (3%) though the state bonds brought profits that were exceptionally

high, in fact, were high beyond all limits. To put it differently, we have

approached a situation when a budget supports a banking system. The situation

started to change in recent months. A more restrained policy of new borrowing

－9－

helped to reduce the state securities transactions profitability drastically while the

budgetary efficiency of the state bonds started to increase gradually. As result of

that banks are losing the pillar they used to enjoy. The case in point is not about

the expected crisis of the whole banking system. However it is clear that decrease

of profitability of transactions with the state securities and the transition to a

situation when the well-being of banks will be connected with their ability to

invest in efficient productive projects will be extremely painful for many

financiers.

It is impossible to expect a successful progress of reforms in Russia and

the advent of a sustainable economic growth unless the knot of problems

considered above is undone. Alongside with consistent macroeconomic policies a

meticulous work aimed at institutional reform of economy and at the whole range

of micro-level issues are required as they have been never required earlier. An

objection may be raised: the necessity to supplement macroeconomic policies

with measures to be taken at the micro-level is mentioned in the medium-term program of the government for 1997 － 2000 and, moreover, a number of

specific measures are pointed out in that program. True, it is mentioned, true,

measures are pointed out, but all that was repeatedly mentioned, said, pointed out

since the beginning of reforms. Yet in the reality micro-level of reforms has

always skidded and dragged behind.

Experience of other countries with the transitional economies may be used

in the course of invigoration of this work in Russia. By mid-90s a real progress in

formation of market institutions has been achieved, the requisite base of

fundamental norms of the transitional and market systems has been established,

persistence in implementation of an appropriate microeconomic policies has been

demonstrated in some of these countries, first and foremost in Poland and

Hungary. These policies were focused on the following principal elements:

definition and protection of the property rights; contractual relations; procedure of

economic activities’ beginning and cessation; provision of the competitive

environment; procedures of market institutions formation that are specific for the period of transition － see /4/.

－10－

Problems related to the management of state (as a rule, big industrial)

enterprises deserve a special attention. The Polish experience is of particular

interest. In Poland the scheme of the state enterprises commercialization ( which

approximately corresponds to the Russian method of “conversion into joint stock

companies” which implied no transfer of shares to non-state owners) has been

proposed and implemented. For some enterprises that comprised “the vital

interest of the state” sphere the direct management has been envisaged. This type

of management is similar to management introduced at the state enterprises in

Russia (in Russia, due to peculiarities of the Russian industry structure, relatively

greater weight of the military-industrial complex, branches that are the natural

monopolists etc. the number of such enterprises will always be greater than in

East European countries). Commercialization was combined with the sanitation

of enterprises at the expense of the state. At the same time majority of enterprises

have acquired the full independence and autonomy; they have been separated

from the state and the operative management has been transferred to managers

hired on the basis of long-term contracts between them and the state. There is

nothing like that in Russia.

It is expedient to consider preservation of a large, market oriented public

sector only as an intermediate strategy for the subsequent privatization because

dragging out of privatization is fraught with decrease of efficiency and financial

stability for the economy as a whole. Under conditions of a long functioning of a

considerable public sector, according to the market laws insoluble problems of

market selection and preservation of strict budgetary limitations arise. It was

precisely the situation which emerged in Poland by 1996. The situation prompted

the Polish government to launch a more vigorous privatization and to restructure

the industry. Due to the sanation many enterprises and banks underwent in the

recent years conditions for privatization got to be more favorable then they were

earlier.

Really, it is necessary to relate to possible using of the Polish experience in

privatization in Russia carefully. Anyway, broad discussion and achievement of

consensus in society on such questions are necessary.

－11－

One more lesson consists of the necessity to carry out a budgetary

reform as soon as possible. Such reform is topical for all transitional

economies and it became “problem number one” in the post-Socialist states that

had completed the stage of macroeconomic stabilization and massive

privatization. The core of the budgetary crisis which to a varying extent afflicted

nearly all countries of Eastern Europe and post-Soviet countries, is that the state

is unable to retain and maintain an abnormally high (in comparison to a level of

development of every particular country) level of social expenditure and

productive sphere subsidizing.

The problem of the budget crisis aggravation is particularly topical for

Russia. In the recent years a drastic deterioration of revenues dynamics has

occurred. For example, the Federal budget revenues in 1996 amounted to 12.5%

against 14.2% in 1995 (if the consolidated budget is taken into account then the

respective figures are 24.8% and 26.8%). In comparison to the first eight months

of 1996, in the first eight months of 1997 revenues of the Federal budget fell from

11.6% to 10.8% and revenues of the consolidated budget fell from 23.7% to 23%.

The collection of taxes fell in particular drastic way. That is caused by the

deterioration of financial situation of the main part of law-abiding taxpayers.

Low level of tax collection and excessively high liabilities of the state lead

to permanent under financing of the most important expenditure items including

the national defense expenditure, industry expenditure, power industry and

construction expenditure, social welfare and culture expenditure. The real

conditions that emerged in the economy lead to necessity to bring in the draft of

the Federal law “On sequestration of the Federal budget expenditure for 1997”.

It is dangerous not to settle the budget crisis effectively. As the analysis of

the post Socialist countries’ economies demonstrates, a ratio of the state

expenditure GDP depends on results of two processes progress. The first of these

two processes is the process of deflation and monetary stabilization achievement:

the general trend is that the greater is the inflation accumulated in a country and

the sharper is monetary instability, the lower is a ratio of the budget revenues to

GDP during the post-stabilization period and vice versa. The second process is

－12－

the process of the budget crisis overcoming properly. Inefficiency in its settlement

lead to consequences that resemble the consequences characteristic of first

process results: the state expenditures and liabilities are to be adapted to a lower level of the budget revenues － see /5/.

The way to the budget crisis settlement is a two-pronged one. The first

direction is the tax reform. Such reforms are to be carried out in all post-Socialist states 3－5 years after beginning of the transformation because tax systems

introduced simultaneously with other radical changes meet the market mechanism

requirements just in a very general and approximate way (there is an acute

necessity to carry out the tax reform in Russia nowadays).The crucial elements of

the task are the necessity to ensure transparency and stability of the tax system, to

reduce the total tax burden, to systematize privileges and redistribute tax revenues

in favour of regional and local authorities. Secondly, liabilities of the state are to

be realistically revised, the budget expenditures are to be reduced while their

efficiency is to be increased. In this respect the greatest reserves lie in

reformation of the social sphere financing system which provides the next lesson.

The primary reason for this lesson is, first of all, the following: for a long

time the social sphere was at the periphery of reformers’ efforts in the post-

Socialist states. In result of that a considerable decline of standards of living was

characteristic of the transformation period in many countries, even the most

“happy and successful” ones. At the same time the increasing differentiation of

the population’s well-being and incomes went on instead of formation of a

numerous and stable “middle class” which would serve as the social and

economic pillar of market reforms. The significant point is that the social welfare

system did not undergo profound qualitative changes in the years of reforms.

Meanwhile, under the budget crisis circumstances the volume of subsidies,

pensions, means allocated for public health, education and other social

expenditures, taken in its quantitative expression, has decreased considerably

(except Czech Republic where the share of social payments is close to the

Scandinavian countries level). To a great extent, this neglect of the social

problems resulted in the wide spread of “the fatigue of reforms” which

－13－

manifested itself in frequent changes of government and a shift of political

attitudes to the left in a number of countries.

High unemployment levels do a serious damage to economies and social

and political stability in East European countries. In the larger part of these

countries unemployment exceeded 10% of the able-bodied population in the

course of transformation period and remains to be high even in those countries

that experienced economic revival in the recent years. The share of long-term

unemployment (lack of employment for over 12 months) is gradually increasing.

In Poland and Bulgaria unemployment of that kind approached 50% as soon as in

1994.

It is obvious that the social problems mentioned above are rather

acute in Russia which experiences a prolonged and profound economic

slump. The population’s standards of living that are determined by dynamics of the real disposable cash incomes, in 1992 － 1996 decreased

nearly by one third. The extent of well-being and incomes differentiation

remains to be high though it went somewhat down in the recent years.

Meanwhile making of the “middle class” is virtually where it was at the

beginning of reforms. The officially recorded unemployment level in Russia

may seem to be not very high: in 1997 (average per year) it was 3.2% of the

able-bodied population. However, firstly, the unemployment level, if

measured according to ILO methodology, is considerably higher and

amounts to 9%. Secondly, a considerable part of people employed at major

and medium-size enterprises have to work in the part-time regime. Besides

that, one has to take into account the regional aspect of the problem: in

some regions unemployment level is manifold higher that the average level

for Russia as a whole.

The main direction of changes in the social sphere of the post-Socialist

states is a radical reforming of the social sphere financing system, first of all

the reform of social welfare system. It has to evolve towards creation of non-

state organizations and funds that will exist side by side with state funds but

will be financed by installments made by persons who derive appropriate

－14－

benefits from these institutions. Such organizations and funds work in some

countries already (the medical insurance at the enterprises in Czech

Republic and Hungary can be adduced as an example) but the role they play in the social welfare is still unimpressive － see /4/. Sure, the process is not

simple. Rejection of the comprehensive welfare system which was developed

under the Socialism or partial destruction of that system are perceived with

some pain, the more so since in the larger part of the countries considered in

this presentation non-state social welfare institutions are just forming and

cannot replace the existing state institutions right now. However such way,

combined with introduction of the state minimum standards and a more

vigorous target social support, seems to be the most reasonable way.

A special attention should be paid to pensions funds problem. Private

pension funds are being created in Czech Republic since early 1993 to

supplement the existing state system. In 1996 more radical plans to reform

the pensions system are announced in Hungary and Poland. According to

these plans all employed citizens of certain age cohorts will make instalment

payments to private saving funds and total amounts of these payments will

provide for the main part of an individual’s pension which will be added to

the minimum guaranteed by the state － see /4/.

As regards measures to be taken in the field of unemployment

regulation solutions are being searched in the structural policies aimed at

improvement of labour market functioning by virtue of rectification of

imbalances and twists in formation of wages rates, reform of allocation

system of unemployment benefits and payment of these benefits as well as through making interregional and interbranch labour force mobility higher －

see /2/.

Finally, one more lesson consists of necessity to create acceptable

conditions for foreign investors. Initial optimistic expectations about foreign

investment influx into countries with transitory economies were based on

low value and rather high skills of labour force, enormous capacities of the

emerged markets and the liberal laws. However these expectations have

－15－

never come true. By mid-90s the share of East Europe in OECD countries foreign investments was still too small: it was about 2%. In 1990 － 1994

foreign average annual investment influx amounted to less than 3.5 billion

dollars; of these, more than 70% went to Hungary and Czech Republic

where the total combination of conditions for foreign investors is better (to

compare: just in the first half of 1994 Mexico received about 3.3 billion dollars － see /3/). Despite of sustainable growth the direct foreign investments

to Russia are absolutely incomparable with the size of the Russian economy:

in 1996 foreign direct investments amounted to 2.1 billion dollars (against,

for example, 40 billion dollars invested into economy of China).

The main reasons for heightened caution foreign investors

demonstrate are instability of political and macroeconomics situation, in

some countries aggravated by a difficult crime situation and raging

corruption as well as instability of the legal basis (including taxation and

customs regulation issues), lagging in creation the requisite market infrastructure

in most of post-Socialist countries and risks related to the circumstances

mentioned above.

A questionnaire poll on terms of economic cooperation with Russia carried

out by Kaigai Doyukai, a Japanese association, in February, 1996, among 176

members of the association board brought results that were demonstrative and

reflected opinions of a wide circle of enterprises from 16 branches where the

bosses questioned worked. Among the main problems in making business with

Russia the Japanese entrepreneurs noted: uncertainty about Russia’ future

political and economic situation (that was mentioned as a source of general

concern); ill adjustment of the financial and credit system, i.e., the mutual

settlement problem (that was pointed out as a concern related to the sphere of

practical business, to investments into Russian economy in particular); frequent

modifications of taxation introduction of new taxes, vague and dim division of

administrative bodies’ powers. Participants of the poll carried out by Keidanren

noted additionally “nontransparency” of financial information concerning

Russian enterprises and difficulties in functioning of joint enterprises,

－16－

particularly, some attempts of finishing of such enterprises activities and “pushing

out” foreign investors.

The states with transitory economies keep on to claim for considerable

influx of investments they have to focus their attention and efforts on elimination

of the reasons noted above. In general, economic incentives comparable with

those that exist at other forming markets are to be created for foreign investors

while non-commercial risks are to be reduced to minimum. Herewith, limitations

for foreign investors should be removed, even along with the absence of

preferences for them.

－17－

Literature.

1. “Europe and Russia: an Experience of Economic Transition”. Russian Academy of Siences. Moscow, 1996, pp.245－259.

2. D.Rosati. “Five Years of Market Transitions in East Europe:

Expectations, Results and Goals of Politics”. The World Economy and International Relations, 1996, N 4, pp.68－81.

3. P.Rayment. “Hard Way to Market Economy: Realities and

Illusions”. The World Economy and International Relations, 1996, N 5, pp.64－77.

4. A.Nesterenko. “State Economic Policy in the East-European Countries”. Problems of Economics, 1997, N 1, pp.104－115.

5. E.Gaidar. “Infant Illnesses” of Post-Socialism (On the Nature of

Budget Crises during the Period of Financial Stabilization) ”. Problems of Economics, 1997, N 4, pp.4－45.

－18－

Table 1

The dynamics of real GDP

( as a % of the previous year)

Countries 1990 1991 1992 1993 1994 1995 1996 (preli- mina-

ry)

1996 as a %

of 1989

Albania Bulgaria Hungary Latvia Lithuania Makedonia Poland Russia Romania Slovakia Slovenia Croatia Czech Republic Estonia

－10.0

－9.1

－3.5

2.9

－5.0

－9.9

－11.6

－4.0

－5.6

－2.5

－4.7

－8.6

－0.4

－8.1

－27.7

－11.7

－11.9

－8.3

－13.4

－12.1

－7.0

－13.0

－12.9

－14.6

－8.1

－20.0

－14.2

－11.0

－9.7

－7.3

－3.1

－5.0

－37.7

－21.1

2.6

－14.5

－8.8

－6.5

－5.4

－10.0

－6.4

－14.2

11.0

－2.4

－0.6

－6.0

－24.2

－8.4

3.8

－8.7

1.3

－4.1

1.3

－3.7

－0.9

－8.5

9.4

1.8

2.9

0.6

1.0

－4.0

5.2

－12.7

3.9

4.8

5.3

0.8

2.6

－2.7

8.6

2.6

1.5

－1.6

3.1

－1.5

7.0

－4.0

6.9

7.4

3.5

2.0

4.8

3.2

5.0

－4.0

1.5

1.0

1.5

3.0

5.0

－5.0

4.5

5.5

3.0

5.0

5.1

3.0

81

73

87

52

41

56

103

53

88

89

94

68

90

66

－19－

Table 2

The dynamics of inflation ( consumer prices)

( as a % of the previous year )

Countries 1991 1992 1993 1994 1995 1996 (prelimi-

nary) Albania Bulgaria Hungary Latvia Lithuania Makedonia Poland Russia Romania Slovakia Slovenia Croatia Czech Republic Estonia

104

339

32

262

345

115

60

144

223

58

247

249

52

304

237

79

22

958

1161

1935

44

2510

199 9

93

937

13

954

31

64

21

35

189

230

38

840

296

25

23

1150

18

36

16

122

21

26

45

55

29

220

62

12

18

－3

10

42

6

33

28

23

36 9

22

131

28 7 9 4 8

29

20

165

22

19

26 2

19

22

60 6

10 5 9

24

Working Paper No.1 Industrial Transition and Policies in the Development Process of the Korean Economy

Park Joon Kyung, July 1991 No.2 Retrospects and Prospects of Thailand’s Economic Development

Somchai Jitsuchon, July 1991 No.3 A Perspective on Philippines Economic Performance and Development Strategies

Josef T. Yap, July 1991 No.4 The Japanese Economy during the Era of High Economic Growth, Retrospect and

Evaluation Akira Sadahiro, July 1991

No.5 Structure of the Economy and Financial Policy: The Role of Structural Policy in Realizing Market-Oriented Reforms

Mikhail Ksenofontov, April 1992 No.6 Social Security and Social Network in Japan

Shuzo Nishimura, April 1992 No.7 Savings in Asian Developing Countries －－ What Measures Could be Taken to Stimulate

Private Savings in Thailand? Jun Saito, September 1991

No.8 Possible Lessons for the Transition to a Market Economy and Durable Economic Growth with the Reference to the Postwar Japanese Economy

Akira Sadahiro, April 1992 No.9 An Introduction of the Market Mechanism into the CIS Economy

Katsuhiro Miyamoto, April 1992 No.10 Experience of East Asian Newly Industrializing Economies

Fumihira Nishizaki, May 1992 No.11 Monetary Policies and Money Markets in Indonesia

Masaaki Komatsu, July 1992 No.12 The Structure and Function of Distribution Industry in Korea

Lee, Jae-Hyung, November 1992 No.13 Some Issues on Privatization and Policies for Promoting Export of Vietnam

Dinh Thi Chinh, November 1992 No.14 Mongolian Reforming Process to a Market Economy

Budsuren Tumen, November 1992 No.15 Economic Reform in Russia, Present and Future

Eugene E. Gavrilenkov, November 1992

No.16 Deepen the Economic Reform and Opening Market Tie Jun Lee, February 1993

No.17 Economic Reform in Czechoslovakia Vratislav Izak, May 1993

No.18 Economic Reforms in Belarus, Present and Future Alexander N. Potantsev, May 1993

No.19 Ukraine: The Road to National Statehood Creation Igor Bourakovskii, May 1993

No.20 The Russian Economy: Present Problems and Prospects for Reconstruction Vitali G. Shvydko, May 1993

No.21 Reform of Macroeconomic Policy in Cambodia Chhieng Yanara, May 1993

No.22 Rapid Growth and Step by Step Reform in China Ning Jizhe, May 1993

No.23 Patterns and Effects of Financial Sector Reform in Indonesia Mubariq Ahmad, May 1993

No.24 The 1993－1998 Medium-term Development Plan;

Its Financial Resources Requirements Edita A. Tan, May 1993

No.25 Philippines: Macroeconomic Agenda and Prospects for the Medium Term Charito D. Arriola, May 1993

No.26 Conditions for a Successful Economic Reform in Indochina and the Role of Thailand Somsak Tambunlertchai, June 1993

No.27 Recession, Restructuring and Recovery － What Japanese Experience Suggests to the Romanian Economy －

Shoichi Kojima, June 1993 No.28 Development in Chile: Some Facts and Thoughts

Felipe G. Morande, June 1993 No.29 A Note on the Chinese Economy: Current Conditions and Prospects

Yasuko Takayanagi, July 1993 No.30 Korea’s Economic Development Strategy and Economic Policy Direction of the New

Government Sung-Taik HAN, August 1993

No.31 Financial Deepening and Economic Growth in the Asia-Pacific Region － A Lesson from Financial Deregulation in Indonesia －

Hiroyuki Taguchi, August 1993

No.32 Regional Cooperation between Thailand and Indochina Area Pruittiporn Nakornchai, November 1993

No.33 Economic Reform in Mongolia Lkhagvagiin Demberel, March 1994

No.34 Same Theoretico-empirical Aspects of a Transition Economy Sambuugin Demberel, March 1994

No.35 Economic Reform in Poland, 1989－1993 (Structural Transformation)

Jarzy J. Kropiwnicki, March 1994 No.36 Chile’s Structural Adjustment: Relevant Policy Lessons for Latin America

Luis A. Riveros, May 1994 No.37 社会主義国家の経済改革の比較研究

－アジア圏と東欧圏がどうして違った発展をするのか－ 李 鎬 徹, June1994

No.38 AFTA, WTO AND PHILIPPINE SMES Manuel D.Cantos, October 1994

No.39 Currency Market, Exchange Rate and Macroeconomic Situation of Russia in 1994 Lubov D. Dolzhenkova, April 1995

No.40 Government Plan of Financial Stabilization for Russia in 1995 Andrei Illarionov, May 1995

No.41 Implications of G.A.T.T. on the Philippine Agriculture Sector Doreen Carla E. Erfe, June 1995

No.42 The Transition to Market Oriented Economy: Case of Romania －the Present Facts and Situations－

Cernei Florin Ovidiu, June 1995 No.43 The Japanese Labour System －A Critical Analysis－

David M. Berry, July 1995 No.44 Moral Hazards in Japan’s Main Bank System

Luke Gower, October 1996 No.45 Economic Policies for Macroeconomic Stabilization and Sustainable Economic Growth

in Russia (an experience of radical reforms in Russia) Volkov Vladimir Nikolaevich, November 1996

No.46 Review of Economic Relations between Russia and Japan, in Particular Future Relations between the Russia Far East and the Asia-Pacific Region

Varlamov Victor Sergeevich, November 1996 No.47 Long-Term Economic Growth Strategy

Abelin Alexander Pavlovich, November 1996

No.48 Structural Adjustment in Indonesian Economy Arief Ramelan Karseno, February 1997

No.49 Thailand’s Development Strategies and Prospects for the Twenty-first Century Athipat Bamroong, February 1997

No.50 Financial Stabilization in Russia on 1992－1995: Policy and Results Alexey Ulyukaev, February 1997

No.51 Russian Enterprises: System Failure and External Problems Yaroslav Kouzminov, February 1997

No.52 Privatization in Russia: Announced Success and Real Failure Nikologorskiy Dmitriy Yurevich, February 19

No.53 A Characterization of The Chilean National System of Innovation Jose Miguel Benavente H., March 1997

No.54 Korea’s Efforts in Official Development Assistance Ho-Chul Lee, March 1997

No.55 韓国における国民福祉年金の導入延期措置の経済効果

March 1997 No.56 Asian Regional Economic Development: How Important Have Economic Policies Been?

Moreno Bertoldi, September 1997 No.57 Economic Outlook of Polish Economy for 1998

Witold Skrok, Katarzyna Zajdel, November 1997