-Germany · Essentials of the. Monetary and Economic Uniondocuments.worldbank.org/curated/en/... ·...

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SOCIALIST ECONOMIES UNIT bull COUNTRY ECONOMICS DEPARTMENT bull THE WORLD BANK

-Germany middot Essentials of the Monetary and Economic Union

O n July 1 1990 the two Germaflysenteredintoamonshyetary I economic and social

union an event that initiates the Gershyman Democratic Republics (GDR) conversion to a market economy In many respects the German experi ence will be unique but as the process unfolds many lessons will emerge for other COUltriell in transition

Monetary union

In early February 1990 the governshyment of the Federal Republic of Gershymany (FRG) offered to replace the GDRs Mark with the OM as the comshymon currency unit on the condition that the GDR simultaneously [creshyate] the legalgtrerequisites for introshyducinga social market economy This was a dramadc sep in laying the foundation fl)r German economic union (All pnvious proposals envisshyaged a gradual transition of the GDR towards a market economy)

Monetaryand economic union is based on an immediate extension of the ecoshynomic space of the Federal Republic to the GDR thus removing all obshystacles for labgtr and capital flows and private sector activity After the inshytroduction of an entirely new envishyronment on eruly 1 the adjustments are taking place throughout the real economy

The conversicln fre-m the Mark to the DM led to considf~rable controversy In recent years the average implicit

exchange rate for convertible curshyrency exports had been 41 and free market rates outside the GDR had even reached 151 (in 1989) Howshyever there were good arguments for a 11 conversion apart from political symbolism Nominal(ll)netwages in East Germany were about 45 pershycent of West German levels and productivity has been estimated at about 50 percent of West German levels (with considerable sectoral varia-

- tions) Therefore although 11 conshyversion appeared feasible for wages

Whats inside

Quotation of the Month Milton Friedmans View

The unprecedented political uphealfshyala that believers in human freedom have welcomed with much joy can be the prelude to camparable economic miracles but that is far from inevishy

_ table warns Milton Friedman in hi recent article in The National Review (page 6)

An Evolutionary Perspective tor Eastern Europe

At a recent seminar in the IMP Peter Murrell of Maryland University argued that ifone really wanta to understand the poor perfonnance of the Eastern European economies one should acIopt an evolutionary - or Schumpeterian - perspective on the natu of ec0shynomic processes (page 8)

and other current payments savings accounts (51 percent of GNP) represhysented a considerable liquidity overshybar Further state enterprises had conSIderable debts (the counterpart of these household assets) Many would not have been able to survive if their liabilities had been converted at 11

For these and social reasons the adoptedapproachwas siJllilarto that for claims in a bankruptq or restrucshyturing proceeding Wages pensions

Liberalizin the EthiopianEooIlOID

Ethiopia will be experiencing imporshytant trazulitional problems in pursuing thepathoCthoroughgoingliberalization annoUnced by the government on 5 March 1990 (page 10)

On the World BaDkIIMF Acenda (page 12) __

Book and WorldDC PaPlr BrieC (paae 13)

New Boob and Workin Pa (page 14)

ContereDce Diary (page 15)

Biblioph ot Selected Miele (page 16)

Volume 1 Number 4middot5

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Soclallst Economies In Trcnsitfon ihe World BonkCECSC

stipends rentals and other current payments were converted at 11 All other claims were converted at 21 except liquid assets of individuals which are converted at 11 up to a ceiling of2000 4000 or 6000 Marks depending on age (children adults pensioners) The resulting conversion is thus 11 for current payments and an average of 1861 for future claims The conversion rate for current payshyments actually has only limited sigshynificance since prices and wages were de-controlled on July 1 (with some temporary exceptions eg rents)

Conversion of Marks for DM is carmiddot ried out exclusively through bank acmiddot counts With the currency union the FRGs Deutsche Bundesbank asmiddot sumes all central bank functions for the territory of the GDR as well It also takes over some of the personnel and facilities of the former State Bank of the GDR to implement the curmiddot rency conversion and monetary and credit policies

Currency reform has huge consemiddot quences for the balance sheets of fimiddot nancial institutions A substantial part of their liabilities is converted at 11 while almost all assets (ie public enterprise debts) are converted at2 1 leaving large negative net worth For this purpose an equalization fund is being created in the GDR It will allocate claims on the fund (bonds) as assets to financial institutions to cover valuation losses arising from the currency conversion plus shortfalls to meet the capital adequacy rules of West German banks The equalizashytion fund will pay market-related inshyterest rates on equalization claims

Economic union

The principal condition for the introshyduction of the monetary union was the simultaneous creation of a comshymon regulatory environment Its principal characteristics are set out in Article 1 of the German-German treaty as private enterprise compe tition free market pricing and free movementoflabor capital goods and services This does not exclude special forms of property or public participation in economic activities as long as there is no discrimination against private entities

JulyAugust 1990

These broad principles are further elaborated with respect to the role of enterprises intra-German trade exmiddot ternal trade structural altljustment of enterprises agriculture and the environment Enterprisesare~)have full independence over production investmentlaborrelations prices and the use of profits External trade policies are to be based on free trade principles and GATT rules with due regard for existing obligations with CMEA countries The objectives and laws of the European Community are to be gradually implemented in the GDR including the common agriculshytural policy Rapid structur~u admiddot justment of enterprises in the GDR will be promoted with the objective of improving productivity furthering private initiative creating a diversishyfied economic structure and thus laying the basis for more growth and secure jobs For new investments the environmental and safety regushylations of the FRG are to be applied while existing GDR facilities will be adapted to FRG regulations as soon as possible

With the economic union the main elements of the West German tax and budget system will also apply in the GDR although with some templ)rary altljustments and simplifications for the remainder of this year Almost identical penonal and corporate inshycome taxes value added tax customs tariff and a number of excise taxes ltalcohol tobacco petroleum products etc) became effective on July 1 Reshymaining taxes (eg property ta1t inshyheritance tax motor vehicle taxes commercia1tax) will be introduced on January 1 1991 as well as fully equivalent laws and regulations for all tax and budgetary matters The social security funds state entershyprises public utilities and local govshyernments will be separated from the central government budget and borshyrowing limits are stipulated for the central and local government budshygets for 1990 and 1991

Annex II to the treaty indicates which legal provisions of the Federa) Remiddot public were to become laws of the Democratic Republic by the tinle of treaty implementation (July 1 1990) These include the relevant banldng financial sector and insurance laws

2

the economic sections of the civil code the commercial code the joint stockshyand limited liability company laws the merger and acquisition and the monoPGly and fair trade law and lashyborlaws

A number of transitional measures have been agreed upon ~ assist GDR enterprises to altljust These include (a) quantitative restrictions on imshyports of certain agricultural products in~ the GDR to be phased out over two years (b) a temPGrary imPGrt duty of 11 percent in the GDR on certain consumer durables (c) an inshyvestment subsidy of 12 percent for the first year and 8 percent for the second year after the economic union provided from the GDR budget and a reduction of the value-added tax in the Federal Republic for imports from theGDRby 11 percentagepointsdurshying 1990 and six percentage points until June 1991

Social union

In accordance with the Gennan conshycept of a middotsocial market economy the

social union is an integral part of the monetary and economic union It coven in particular labor relations and a comprehensive system of social security The principles of labor reshylations ~ be applied in the GDRare to be equivalent to those in the FRG These include freedom of association au~nomous wage setting the right to strike worker participation and co-determination and some protecshytion against job termination The GDR will introduce a system of social security equivalent to that of the Federal Republic including retireshyment medical accident and unemshyployment insurance with the same benefits and contribution rates as in the FRG As contributions to unemshyployment and retirement insurance are expected to fall short of expendishytures for SOlQe time the Federal Reshypublic will provide financial assisshytance ~ cover the difference during a transition period

The existing public health care system will continue for the tim being but will be altljusted gradually ~wards the structures prevailing in the FRG by permitting the establishment of private health care providers (doc-

Vokme 1 Nlmber 4-5

SocIalist economies In TralSitton The Woc1d BonkCcCSE

tors pharmacists private and indeshypendent non-profit hospitals etc)

Financing the traDIIition

Introduction of the West German tax system will lead to a substantial reshyduction in size of government The GDR government budget will decline from 77 percent to about 45 percent of GNP Most of this is due to the removal of public enterprise financing from the budget Even mtduding this effect government expenditures are proshyjected to decline by 4 percent of GNP due to personnelleductions and a cut in subsidies These will offset inshycreases in social eXpEnditures (penshysions unemploymen t) Infrastructure investments are projcted nearly to double to 8 percent of Gr-P

The resulting de ricit 15 estimated at about DM 52 billion or 13 percent of GNP for ffte fint full year (1991) Two-thirds of th(~ projected deficit is to be financed by budgetary transfers from the Joederlll Republic (mostly financed through the German Unity Fund of DM lU billion for 199()94) and onemiddotthird Ifrough internal and external borrowing by the GDR govshyernment In addition a temporary financing facility will be created for the restructuring of state en terprises The German-Gel111an treaty does not stipulate financing arrangements beyond 1991- it iSllssumed that a common budget will edstat that time

Ownership

Ownership and privatization issues have been witi the exchange rate among the most difficult issues in negotiating ecorlomic union

The treaty guarantees the right of private investors to acquire use and dispose of land and other productive assets and stiPIdates that land will be made available t() private invesshytors in industral zones and urban areas and that ~tate enterprises will own their land after incorporation In view ofthl abse1ce ofa well functionshying land marke the treaty provides the option to agree at a later date on an adjustment ()fthe purchase price

A joint dec1aralion on ownership isshysues has since been agreed to by both


governments It does not apply to property nationalized before 1949 but leaves open the option of compensashytion Other property is to be returned to previous owners except where property has been physically improved or legally transferred to new owners Compensation has to be provided Enterprises nationalized in 1972 are to be offered to their previous owners For other enterprises shares are to be offered to previous owners taking into account the change in value in the interim

With the economic union there are to be no further restrictions on foreign ownership The company laws and accounting rules of the FRG will beshycome effective in the GDR A law on privatization and reorganization of state property has been passed in the GDR with the objective of rapidly privatizing state property All state enterprises and combines were autoshymatically converted into companies on July 1 They are to befully reshystructured according to the (West German) joint stock or limited liability company laws by October

The state property fund will carry out privatization through a half-dozen subsidiaries organized as joint stock corpo18tions These will offer the reorganized companies for sale The proceeds will be used as follows

bull First to reorganize or close nonshyviable enterprises (the fund also has a line of credit to speed this process) The Minister of Economics recently guessed that 30 percent of state enshyterprises would be competithe anshyother 40 percent could be restrucshytured and 30 percent would have to be reorganized or closed

bull Second to improve GDR governshyment finances especially through amortizing the equalization fund and other government debt

bull Third distribution of state propshyerty to the population at large This will be carried out in proportion to savings converted at 21 East Germanys assets will be sold to fund losses of the banking system and to payoff debts with the residue to be shared among the population based on indi vidual financial wealth

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The economic consequences of the monetary and economic union are difshyficult to predict as this is an unprecshyedented change in economic policy and systems A number offactors are particularly crucial and closely inshyterrelated Careful trade-offs had to be made involving the exchange rate the speed of structu181 changes prishyvate capital infll)ws and external lashybor mobility

In setting the rate of exchange and thus initial wages the t18de-off was made between maintaining external competitiveness for GDR enterprises on the one hand and limiting migrashytion on the other The 11 conversion can only be justified on the basis of the GDRs shift to a totally different economic system and large inflows of capital technology and management The high initial wage rateswill parshyticularly affect the agriculturalmd food industry sectors as these will not be competitive even within the protected EC agricultural market For this reason tempo18ry quantitative restrictions have been agreed upon to give GDR enterprises time to meet EC sanitary and quality standards

Labor mobility between the GDR$1ld the Federal Republic introduces both constraints and opportunities Avershyage wages will be only half of West German wages~andwagedifferen~als will be even greater for skilled workshyers One can thus expect continued migration (relieving unemployment)

The Two GennanYI in Briel l (1988)

GDB FllG I Area (000 km2) 108 249 Population (million) 168 67 Labor force participation (percent) 538 442 Birth rat (per thousand) 129 HO Productivity (percent of FRG) 49 l()O GNP (DM billion) 350 2122

SodoUst Economies In Transltloh The World BonkCECSC

and substantial pressure for nominal wage increases Ifcollective bargainshying leads to higher wages this probshyably will result mostly in higher unshyemployment since monetary policy is unlikely to be accommodating The success of economic union thus deshypends to a considerable extent on moderation on the partoflaborunions The East German transition to a market economy will in any event proceed with wage rates several times higher in convertible currency terms than in other East European counshytries

Another unknown fsctods the extent to which the private sector will reshyspond to the opportunities arising from economic union Again the change in policies and expectations has been too rapid for current analyshysis to come up with definite conclushysions The unresolved issue ownership has been the main stumbling block at least until the recent passage of the state property privatization and reshystructuring law

Projections about the economic conshysequences of the union for the GDR have to rely on simple calculations and analogies with earlier periods for example the reconstruction years in the FRG after the currency reform of 1948 A simple approach is to make a projection ofFRGgrowth rates and an assumption of the speed at which the GDR would catch up with the FRG Such exercises generally project annual growth rates of35 percent for the FRG for the next 10 years (comshypared to 25 percent without the union) and around 75 percent for the GDR with the GDR reaching 72 percent of West German incomes by 1995 and 88 percent by 2000 comshypared to 55 percent in 1990 This compares to annual growth rates for 1950-59 of 75 percent for the FRG 81 percent for Japan andS7 percent for Italy The investment requireshyments for such a trajectory are forshymidable

Sectoral employment patterns in the GDR have been compared with FRG patterns at a similar stage of develshyopment They imply that the largest absolute declines are likely to be in agriculture mining and industry while commerce and construction will

JulVAugust 1990

probably see the largest absolute inshycrease in jobs Employment in I)ther services is expected to increase only slightly overall as large gains in some sectors (finance business services tourism personal services) will be compensated for by job losses in education and public administration (defense security Party employshyment)

Inflation can be expected to remain moderate in the medium term due to the Bundesbanks conservative monshyetary policies for both Germanys But the removal of all price controls and barriers to trade (on July 1) will unshydoubtedly lead to considerable changes in relative prices in the GDR over the next 12 months With the introduction of the FRG tax system the heavy tax burden on industry will be considerably lightened reducing gross value added in indUstry by an average of 50 percent Consequently industrial consumer goods prices are expected to decline by 25 percent or more while food prices are likely to increase by 20 percent due to the removal of most subsidies The cost of many services is also expected to rise

The principal effects on the Federal Republic will be (a) an increase in publie sector expenditures due tel fisshycal transfers of up to DM 50 billion to the GDR (blCh1ding investments in telecommunications and railways) (b) an increase ofexports to the GDR of DM 30middot50 billion and (c) FRGprivate

sector investments in the GDR estishymated at DM 20 billion per year combined with some reduction of planned capital expenditure in the FRG

Ifthese exogenous changes are incorshyporated into macro-economic models for the FRG the results include (a) an increase in employment and ec0shynomic growth of 07-10 percent pL (b) an increase in long-term interest rates of one percentage point (which has already happened) (c) increased tax revenues due to buoyant growth thus reducing net government borshyrowing by DM 40 billion by the third year and reducing net borrowing to about DM 10 billion and (d) an inshycrease in imports combined with lower growth of exports to the rest of the world thus reducing the DM 100 billion current account surplus (and capital exports) by a significant fracshytion This produces a small but sigshynificant stimulus for the world economy But it makes fiscal ~djustmiddot menta elsewhere more urgent as the availability of capital exports from the FRG declines

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4 VokJme 1 Ntmber 4-5

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SocialIst EconomieS n Transition The World BonkCE~E

I Milestones of Transition

bull In May the Czecholovak governshyment approved a comprehensive set of economic measures to effect a rapid transition from a command to a marshyket economy Tbese irlclude plans for the regulation of foreign investment the privatization of state property a commercial code tax reform and antishymonopoly regulations The plans inshycorporate a schedule for the reform of retail prices and a proposal for the reform of wholesale prices The target date for currency convertibility is set for January 1991

In addition the government has aushythorized the creatior of a number of new institutions to facilitate the ecoshynomicrefigtrm process APrivatization Office will be formed which will assist with the privatization of state propshyerty EnploYT1lent offices will start operating thisAllgUSt astockexchange will be in operation by January 1991 and a commercial court will be es~ lished by January 1991 An investmiddot ment bank has already been created and commercial banlu will come into operation in 1991

bull At theJune 6-7 high-level meeti ngof the 17-nation (oordjnating Commitmiddot tee for Multilateral Export Controls (COCOM)all rl1embersagreed to take a comp1ehensie approach to adapt COCOM to the iecen t historic changes in the EastmiddotWest strategic environshyment Membe Bireeci to overhaul the dualmiddotuse control list by December 1990 through the ~-eatlon of a ccore list- Th result will be a restructured and further Nduced control list enshycompassing or1ly the most strategic goods and technologies The core list will befcrmed primarily on the basis of middotstrategc critiealitybut will also take into account controllability of an item and availabilily from non-COCOMmiddot member source-s Members al so agreed to take immedlate rneaaures to facilimiddot tate formation of the core list They are

bull Subetanlial d~econtrol in the arshyeasofcomputeS telecommunications and machine tlXgtis tor which most exshyport requests ue made Czechoelovashykia Hungary and Poland will receive immediate preferential access to even moremtgtdern telecommunications 8)8shy

temL

bull Elimination of30 of the 116 categoshyries on the COCOM dual-use control list effective July 1 1990

bull In areas not affected by the meashysures ahove outright decontrol for all destinations to approximately the level now exportable to China with no prior COCOM review

bull In recognition of the unique situashytion between East and west Germany adoption of a greatly reduced list of exmiddot port controls for EastGermany which in turn will adopt anexport-con trol system

Further COCOM members agreed to grant wide-ranging special licensing privileges (beyond the area of telecomshymunications) to East European countries that COCOM agrees represent a lesser strategic threat and that have adopted adequate safeguard regimes to protect controlled technology from unauthorized use These countries will receive a preshysumption of approval for all but a few controlled dual-use items To ensure that COCOMs new control list Nsults in the goalofhigherfencesaround feweritemsmiddot membere agreed to take concrete stepsby April 30 1991 to ensure equal andetrecmiddot tive enforcement of controls by all memo

middotbers

bull On July 13 in PolaDd the Parliaments lower house approved the privatization bill that would give every citizen a share in any of several thousand companies now owned by the state Under the bill likely to be passed by the Senate every Pole would receive coupons that could be exchanged for stock in any of the state-run companies that are slated for private ownership Inadditionemployees would be able to buy more shares in the compashynies where they work at preferential prices - up to 20 percent of the shares in each company would be set aside for workers purchase Beyond the eqwty reserved for the coupon exchange and the reducedrateofferinga to workers the plan envisions the sale of the remaining and greater portion of shares to the general public over a number of years

bull On June 19 the government of Sudan approved a plan to end state control ofthe major sectors of the economy and move toward a more market-based system A gradual end of state monopoly in agricul

ture textiles leather sea and air transport hotels and telecommunicashytions has been approved along with a target of three years to balance the budget

bull In June and July a numberofimporshytant law were approved by the Sushypreme Soviet The measures represent asigniticantstep forward in theSoviet Union toward creation of the legislashytive framework for a market economy The new laws include the Law on Enmiddot terprises which is to become effective from January 1 1991 amendments to the May 1988 Law on Cooperatives which will become effective on October 1 1990 a government statute on joint stock companies which was approved on June 19 and will have immediate effect a law on the taxation of entershyprises which will take effect from January 1 1991 The statute on joint stock companies is a lower-level execumiddot tive measure pending approval of a law in this area

bull Soviet Foreign Minister Eduard Shevardnadze reportedly told IMF ManagingDirectorMichael Camdessus during their talksin MoscowonJuly28 that the time is right for the Soviet Union to join the IMP The country regardsmembership as a logical conshytinuation of its policy of wider involveshyment in global economic cooperation Shevardnadze said adding that the International Monetary Fund hud helped member countries overcome barriers to development and pay formiddot eign debt and that the absence of t he Soviet Union undermines the global character of this institution The S0shyviet news agency Tass said Camdessus responded positively toShevardnadus proposal for talks

bull The Romanian Parliament in July approved in principle government plan described as the tirst step toward privatizing the economy of Romania The plan envisages the free distribu tion of 20 percent of the estimatoed value of the countrys state-owned inshydustries to the public in the form of I vouchersthatwouldlaterbenegotiated into shares

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Vokrne 1 Number 4-5 5 JuIVIAugust 1990

I If

SocioIst Economies Trawtlon The Wor1d BcInkCECSC


T he transition to freedom [in Eastern Europe] cannot be accomplishedoverrught

The formerly totalitarian societies have developed institutions public attitudes and vested interests that are wholly antithetical to the rapid creation of the basic economic requishysitesfor freedom and prosperity These requisites are easy to state but far from easy to achieve

l First and most important The bulk of wealth (including means of production) must be privately owned in the fullest sense so that the private owner has wide discretion in its use and can transfer it to other private individuals or groups of private indishyviduals on mutually agreeable terms This condition implicitly includes the right of any individual to exchange any services or products with others on any terms that are mutually agreeable ie no control over wages or prices including foreign-exchange rates no restrictions on imports or imports

2 Security of private property is implicit in the first condition Ifgovshyernments can and frequently do exshypropriate property property owners will have no incentive to take a long view- to preserve their property and enhance its economic value

3 For private property to be secure government must be narrowly limited to its essential functions ofmaintainshying law and order inc1udingenfomng private contracts of providing ajudishycial system to adjudicate differences in the interpretation ofcontracts and to assure that laws against theft murder and the like are appliedjustly of establishing the rules Cf the game including the definition of private property

4 I list a relatively stable monetary system as a separate item rather than as part of item 3 for two reasons

JulyAugust 1990

a) As a theoretical matter a stable money can exist without governmenshytal involvement (other than to enshyforce private contracts) That was largely the -case when gold or silver or some other commodity was the base of the monetary system b) As a practical matter the major immediate threat to successful reshyform in most of the countries in quesshytion is inflation and the danger of hyperinflation So monetary reform is a particularly urgent task

The countries seeking to imitate the success of the West will make a great mistake if they pattern their policies on the current situation in the West rather than on what the situation was when the Western countries were at the stage the Eastshyern European countries are at no~

None of these requisites is easy to achieve The one thing that is comshymon to all of them is a drastic reducshytion in the size and role of the govshyernment Such a reduction threatens almost every powerful vested internt in the current society Indeed it will be attainable I believe only wlder conditions of extreme crisis and only ifdone rapidly

A detailed blueprint specifying how to achieve these requisites is not posshysible The specific details will depend on the circumstances of the separate countries which differ widely with respect to economic arrangements public attitudes social structure and political conditions But a num~r of general remarks are possible

With respect to the first requisiteshywidespread private property-some parts of the transfer of governmentmiddot owned property to private individushyals can be done readily for example the transfer by sale of current governshyment-oNned housing units to those existing tenants willing to buy them (for cash or credit) at a price that

6

corresponds to a reasonable capitalishyzation of a private market rental (the qualification is necessary because present rents are often nominal)

-A similar process is possible for relashytively small enterprises governmentshyowned retail and service shops small manufacturing enterprises and the like The most difficult problem is raised by larger-scale enterprises shysteel mms automobile plants shipshyyards coal mines railroads and so on One much-bruited solution must be avoided selling the enterprises at bargain-basement prices to foreignshyers That is equally true of another proposed solution transferringplants to their employees The property has been accumulated at the expense of all the citizens no favored group should get something for nothing Liabilities as well as assets should be transferred to private individuals shynot transferring assets to individuals while leaving liabilities to the governshyment

-Foreigners should be free to invest and engage in economic activities on the same terms as private citizens no specially favorable conditions should ~ granted to them

With respect to security of private property it can only be attained over a long period as a middle class grows up that is independent of the govshyernment and can provide a climate of respect for private property and ownership

With respect to a stable monetary SYstem and indirectly the free-price system required to make private property meaningful two steps are essential first a sharp reduction in government spending so that the govshyernment is not forced to print money to finance its expenditures second prompt elimination of all controls over foreign-exchange transactions and the prices of foreign currencies Convert-

Vokme 1 Nunblaquo 4-5

The WOCId BoNcCECSC

ibility can and should be achieved overnight simply by removing all reshystrictions on the terms on which indishyviduals can exchange domestic curmiddot rency for foreign currencies Governshymen tallymiddotfixed exchange rates are the most pernicious of all price controls inevitably generating other internal price controls and assuring wideshyspread corruption The truth about the real value ofthe countrys currency will hurt - but also be curative

Even though many required meashysurescan and should be taken quickly the transition to a stable and prosshyperous competitive capitalist society will inevitablytakeyears notmonths It will require patience on the part of the populace and faith that matters are moving in the right direction Inshyevitably some people and groups will

suffer in the process However the talk about the enormous costs of moving to a free-market economy is much too gloomy There is no reason why total output cannot start exshypanding rapidly almost immediately after the totalitarian restrictions on peoples activities are removed That certainly was the case in the agriculshytural sector of China after the major reforms of the late 1970s

One final note the widespread talk of the need for major financial assisshytance from Western governments to the emergingdemocratic governments of Eastern Europe is in my opinion not only wrong but dangerous Such aid would do far more harm that good (as most foreign aid has done in the past) It would retard the transition not speed it up The transition reshy

quires above all reducing the sue ad scope of government so that the prishyvate sector can expand and take over basic productive and other activities

The unprecedented political upshyheavals that believers in human freeshydom have welcomed with so much joy can be the prelude to comparable economic miracles butthatis far from inevitable They can equally be the prelude to a continuation ofcollectivshyism under a different set of rulers Everything depends on the politjcaI will of the people the economic unshyderstanding of their leaders and the ability of those leaden to persuade the public to support the radical meashysures that are necessaryshy

From MilJon Frilaquolnuua GTtid in The NGshytional ReIl~IU MGY 14 1990 pp 33)4

Soviet Union Market Economy is an Alternative

The Soviet party (CPSU) congre in July approved a program statement inel uding an Action Program that calls for historic changes in the Soviet economy The following excerpt is a verbatim tranelation of the mOilt imshyportant part of the Programs chapter on the economy

Toward a recuJated market

The market economy is an alternative to the clutmoded administrative-commiddot mand lYstem of management of the nationsleeoQ(limy Advocatingaphased transition to the rnarket the CPSU deems t neceaary to bull accelerate the elaboration oflegislashytive and legal norms and mechanisms ensuring aswi tch to a marketeconomy bull grant enterJnael and all commodity producers regardleu of their forma of ownership autonomy and free entershyprise and to promote the development of healthy 8nd bOll_ competition among them and tomiddot parate the funeticlns oflltate m~ment from direct economic activity bull implement demonopolization of pr0shyduction bankingandinwrance trade and scientifk development give supshyport to the development ofa network of small- and medium-sim enterprises bull gear the state regulation of market relation a to the protection of citizens lOcial rightl earry outmajolltructura1 transformations in the national economy and the tcientifiemiddottechnical

andecalogiceJ programs andsaCeguard

the countrys interesta in the system of world economic Unb Preserve state management ofmajortraMport networka communications the powerindustry and defense complex enterprisee within the framework of a single marketon the basis ofeconomic accountabiUty principles and labor collectives self-management bull switch in the planning system to the elaboration of strategic outlook plans for economic development and targeted ltate programs to indirect regulation of the economy through state ordera pricing depreciation and customs policy taxel interest on credit and 80 on bull enlure the switch to a convertible ruble and to an economy that is open to the world market the creation of favorable conditions for enterprises foreign ec0shy

nomic activity and the involvement of foreign capital to ensure the earliest posshysible introduction of progreuive techshynologiel and suppliel to the market

Market and protection mechaaiam

In view of the fad that the switch to the market il not an end in i taelfbut a means of solving lOcial problems and in view of the pouible adverse conaequences ofthis switch the CPSU proposes bull compensating the populace for loues due to the revision ofretail price ofgoods and ~rvicel introducing a flexible sywshytam for indexing the population monshyetary income and increaing them d pendinon the growth ofconwmerprices bull creating an effective mechanism for maintaining employment for findingjobe

and for vocational retraining compenshysation payments during the period of tem poraryunemployment retraining and acquisition of new skilt bull ensuring lOcial and state monitoring of the obIIervance of laWII regulating market relation

Acrarian polley

In it the party proceeds on the basia of the following raquorinciples bull supporting the Sovieta right to own land and the state collective and inshydividual farms right to use andmmshyage land bull enluring equal economic relagmiddot)ns between city and countryside bull ruling out any kind of diJuct Ilnd bureaucratic rule in all that pertaina to land management and relying on the peasants free choice enlMlring equal opportunities for the developshyment both of lOcial farming (lwlMshycollective farm) and 8OV1eIwz (sate farm) and of newly established idimiddot vidual family and lease f8rming bull ensuring the priori ty development of theagro-industrlal complexs matelialmiddot technical baNo in the light of the reshyquirements of all forms of econcmic management bull enabling every rural inhabitant and everyone wishing to live and work in the countryside to set up his own home and farm holding improving the social infrastructure of the countryside and malcing work on the land lOcially atshytractive and economically eftecti e-

Vollme 1 Number 4-5 7

I

cent J

SocioUst Economies in Tronsitton bull The World BankCE~

An Evolutionary Perspective for Eastern Europe

Drawingon insights gained from his recently published book (The Nature ofSocialist Economies

Lessons from Eastern European Formiddot eign Trade Princeton University Press 1990) Prof Peter Murrell exshyamines some of the dilemmas facing reform economies These are conshytained in a paper An Evolutionary Perspective on Reform of the Eastern European Economies presented at a recent IMF seminar Murrell a Proshyfessor ofEconomics at the University of Maryland argues that economic theories provide metaphors to guide reforms rather than precise lessons

Most current discussions of reform follow very closely from a neoclassishycal or Walrasian paradigm Howshyever there are other paradigms that could be used to provide a broad unshyderpinningforreform ideas Murrells bookdaims that to understand truly the poor performance of the Eastern European economies vis-a-vis capishytalistones takes an evolutionary-or Schumpeterian - perspective on the nature of eeonomic proeesses What are the most important elements of evolutionary theory There are three important facets

bull The first is a theory oforganizashytion-l and individual behavior that sees eonomic agents as constrained not only by financial and physical elements but also by limits on inforshymation proeessing capabilities and diffieulties of exercising control in complex organizations Organizations use routines to diseharge their funcshytions whieh are difficult to change and heavily eonstrained by past cirshycumstanees Hence ehange in orgashynizational behavior is eostly and therefore one should expect much persistence in organizational behavshyior

bull Seeond is the concept of the eCt) nomic environment Given a stable environment for a long enough peshyriod the types ofroutines and behavshy

JulyAugust 1m

iors that are present in any sltoeiety will be conditioned by the environshyment in whieh the ampocietys SUlek of organizations has survived adapted and prospered

bull Third an evolutionary approaeh would emphasize the importance of seleetion proeesses in aecomplishing change Changes within organizashytions are deemphasized in favor of a focus on the shifls in eontrol over eeonomie resourees between ineffishycient(or teehnologicallyobampolete)and effieient (teehnologically progressive) organizations or to new organizashytions better suited to the new eeoshynomie environment

The importance ofemphasizing these three features is that comprehensive economic reform means a radical change in the economic enviromnent by countries that have very large orshyganizational stocks conditioned by the old centrally-planned bureaucratic environment Hence one should view the central problem of reform as a conflict Qetween the weight of the past and the requirements of the new

Weight otthe past

Murrell emphasizes two elements inherited from the past The first postulates that enterprises will rely on procedures suited to an environshyment characterized by bureaucratic allocation and administrative supershyvision as well as consistent eXIess demand Conversely it is unlikely that sueh enterprises will function well in a dramatically different envishyronment Without a very long process ofnatural seleetion ofeconomic units and reallocation of personnel a drashymatic change in the environment might reduce the efficiencyofexisting organizations drastically

The second element posits that the existing organizational framework of socialist economies produces an exshy

8

cess demand environment and that central planning bodies have been able to develop bureaucratic proceshydures to contain this excess demand and thusavoid its worst consequences TheH excess-demand pressures will not be eradicated by simply changing incentives and the locus of decisionshymaking as in traditional models of decentralizing reforms

The two elements come together in the acknowledgement that the excess demand created within the system is a crucial characteristic of the envishyronment The enterpriHS were born and survived in this high-pressure exeess-demand environment Many obHrvers have eommented on howshywell enterpriH arrangements are structured for such an environment Therefore an attempt to control the excess demlPld by radical new meashysures could necessitate a complete reorganization ofenterprises Such a procesl might take many years of reorganization by trial and error and natural selection During that time of adversity and change the efficiency Qfthe existing organizations might be very low

Requirements of the new

In the evolutionary view appropriate organizational behavior for a parshyticular environment does not come about because of conscious decisionshymaking on organizational design Rather there is much difference in opinion about what constitutes optishymal organizational design and ratioshynal decision-rules Therefore selecshytion processes have a vital role in producing an efficient society Overshystating matters somewhat a society has efficient organizations for a given environment solely becauseits stock of organizations are the winners in an efficiency race- in a given environshyment not becauH people know how to produce efficient organizations Assuming that effective selection processes are required to produce a

VoUne 1 Nlmber 4-5

Prom the Czacholovakian maauine DiluJOnu

9 JIifA~lt 1990

dynamic economy three features of social arrangements are required

bull First society must create condishytions under which a variety of new economic organizations are formed The new entrants will almoatcertainly come from the domestic private sector and from foreign direct investment Therefore an important question for reform is how the state could best foster the entry ofdomestic newcomshyers The most successful newlyshyformed private companies will need loans to finance growth this may conshyflict with macroeconomic austerity

At the same time these companies are unlikely to have the personal and political connections that state entershyprises inherit from the old regime Nor can such companies expect to match the security that the implicit backing of the treasurey affords to state enterprises Therefore macroeconomic stringency in the prishyvate sector is inappropriate at the very earliest stages of reform

bull Second the selection of units shyfor destruction or for survival for expansion or contraction - must be based upon economic criteriL Surshyvival and growth should depend upon revenues and costa calculated using prices based on economic criteriL In the increasingly integrated world economy those pncmustbe heavily influenced by world market valuashytions

bull Third for the efficacy of a selecshytion process there must be continuity in theenvironment Selection ofunita must yield the promise that these units will be the most efficient ones over time Hence a stable environshyment should be created and this enshyvironment should be as similar as possible to the one that is envisaged as the goal of the reConn proceaa There is not much disagreement on what that environment will lock like The economy will be one with a large private sector that is open to foreign trade Hence the environment that is envisaged at the end of reform is very different from any environment that would include the organizations presently existing in the Eastem European economies

Five deep contradictions

Murrell summarizes his argument by pointing to five deep contradictions between the legacies of the past and the requirements of the new

bull A radical change in the environshyment (that is reform) might diminish the productive efficiency of the state sector while the private sector is not yet ready to take up the slack Moreshyover theefficacy of selection processes in the private sector requires a fairly stable environment for that sector Again this environment must be similar to the one at the end of the reform process How can reforms provide continuity with the past for the state sector and continuity with the future for the private sector

bull Historical experience shows that only draconian macroeconomic meashysures will control excess demand in a marketized state sector However encouragement of the selective proshycess requires a non-restrictive macroeconomic policy to provide a fertile environment in the short run for new private sector entrants How can reform combine macroeconomic stringency in the state sector with non-restrictive macroeconomic polishycies in the private sector

bull Failing a draconian fiscal monshyetary and exchange rate policy bushyreaucratic intervention is needed to contain the excess-demand pressures of the state sector However such bureaucratic intervention is inconshysistent with the selection ofeconomic units on economic criteriL How can bureaucratic intervention in the state sector be combined with free markets in the private sector

bull Immediate exposure ofthe state sector to foreign trade i extremely risky fortwo reasons the introduction of world prices and trading conditions might cause a large decline in state sector productivity and openness without macroeconomic austerity will implytheaccumulation offoreign debt by the state sector However because the long-term goal is openness to forshyeign trade selection in the private sector must be in an environment that includes foreign competition How can continuing insulation of the state sector be eombined with openshynels of the private sector

bull In the short run competition between the state and private sectors has little chance of identifying the entitiel most suited to the environshyment that il the desired end-state of refonn It economy-wide free mar-

IMANUIL IAKU

The Wald BankCECSE

kets were immediatelyinstituted the decisione of state firms would largely determine aggregate economic reshysults These decisiona would not be those of competitive private firms because ofthe effect oforganizational structures inherited from the past The effects ofhistory ensure that the selective race can never be handishycapped in a way that provides the appropriate test of the relative abilishyties of the two sectors How can the state sector be prevented from ruinshyingthe selective process in the private sector

Maintain a dual economy

How can a reform resolve the contrashydictions identified above Murrell suggests that the only possibility is to maintain a dual economy during transition The state sector must be

subject to the traditional bureaucratic controls In some cases re-centralizashytion might even be required during the early months or years of transishytion At the same time the private sector of the economy should be alshylowed to function freely withouit censhytral help or hindrance

Murrell emphasizes that the dual economy policy that he advocates is no less comprehensive than the typishycal plans for reform thatare currently circulating Nor is the dual economy strategy likely to be slower in terms of its effect on national economic perforshymance The typical reform plans emshyphasize a comprehensiveness across sectors while the various functional elements of capitalist markets (eg macro-balance decentralization free prices convertibility) are phased in

In contrast Murrell suggests a policy that is comprehensive in that it imshymediately introduces all the functional elements of capitalism into a small and growing private sector The transfer ofthe state productive sector into the private sector is handled in phases enterprise-by-enterprise or perhaps sector-by-sector Thus in comparingMurreUssuggestionswith other reform plans the issue is not comprehensiveness versus a pieceshymeal approach No reform will do evshyerything atonce given the immensity of the reform task Rather the question is what components ofcommiddot prehensiveness to choose The usual schemes emphasize comprehensiveshyness across sectors Murrell emphashysizes comprehensiveness across the functional elements of capitalist inshystitutions bull

Liberalizing the Ethiopian Economy

It is a moot point whether the Ethioshypian economy of the 1980s should be thought of asan African economy

with socialist trappings oraneconomy organized along Marxist-Leninist lines set within an African context Whatever the case Ethiopia will be experiencing important transitional problems in pursuing the path of thoroughgoing liberalization as announced by the government on 5 March 1990 The core of transitional problems lies in the state enterprises sector where hitherto hidden ineffishyciencies are likely to be exposed as physical planning gives way to conshytrols based on profitability and as private sector competition intensifies

The background to Ethiopias ecoshynomic reform is a decade of very low growth and falling percapita income s virtual1y fia t trend in export growth and a chronically overvalued exchange rate On the institutional front S0shycialization had proceeded by degrees with the nationalization of mediumshyand large-scale enterprises in all secshytors and with the progressive but less than complete reduction of the

JutvlAugust 1990

role of the private sector in domlBstic and external trade Peasant farmers were subject to bureaucratic controls that inter alia denied them security of tenure

Prior to reform the economyhad dual characteristics The public se~tor received allocations of foreign exshychange at the official rate for imports of capital and for intermediate and consumer goods it produced at costs thatreflected wage and price controls it handled the majority of official exshyports - which it was able to procure by din t ofexport subsidies or as in the case ofcoffee through restrictions on domestic marketing and itdistributed consumer goods domestically at less than market-clearingprices through public distribution channels The public sector was subject to state planning with annual budgets covershying output investment and financial flows for each enterprise Although they were profitable in aggregate the efficiencyand competitivenessofmost state enterprises were weakened by overmanning wage fund determinashytion procedures that rewarded proshy

10

duction rather than productivity and the absence of profitability and effishyciency targets for management

There was at the same time a parallel private sector economy characterized by household enterprises in peasant agriculture distributive services and small-scale industry that respectively accounted for approximately 35 pershycent 10 percent and 5 percentofGDP Official restrictions forbade private investment in commercial farming and strictly limited its scope in the production of non-farm goods and services Despite inhibiting condi tions attached to trade and transport lishycenses distribution wu the easiest avenue of development In private trade foreign exchange wu at a substantial premium and other prices i neluding those ofexportables were significantly higher than in the state sector Coffee livestock and small quantitiesofgold were smuggled out and private imports some also smuggled were financed from the proceeds of unofficial exportaand from the remittances of expatriate Ethioshypians

VolIme 1 Ntmber 4-5

SOdctlst Economies In TrawHlon

The reform of 1990shy

The economic reform of 1990 was in- spired by a desire to break the cycle of stagnation and economic underpershyformance The governments analyshysis was that growth had been held back by the absence of opportunities for the private sector and by the disshyappointing results achieved by the socialist sectors including the state enterprises and producer cooperashytives Its prescription was to remove the limits on private sector activity to give the private sector fiscal inshycentives and to commence the task of reforming the public sector byexposshying it to private sector competition and by resolving to judge its perforshymance on the basis of profitability rather than output volume So far the government has acted by

bull Promising peasants security of tenure and ending pressure on them to form consolidated villages and proshyducer cooperatives

bull Liberalizing grain marketing with the abolition of the compulsory sale of low price quotas to the state

bull Diminishing or ending the moshynopoly rights of other state trading entities responsible for wholesale doshymestic distribution imports and the exports ofcoffee and othelcommodishyties

bull Reducing the administrative enshytry barriers to internal trade and greatly increasing the number of lishycensed traders

bull Abolishing asset value ceilings and business expansion restrictions on privatE investment in manufacshyturing and seJVlces

bull Allowing private and foreign inshyvestment in all sectors including commercial farming housing andreal estate development with very limshyited exceptions for public utilities telecommunication and defence inshydustries

bull Assuring foreign investors the right to repatriate dividends and profits

bull Offeringprivate investors a range of fiscal incentives including a top marginal rate of income tax of 59 percent (reduced from 89 percent) tax holidays of up to five years and import duty exemptions

bull Streamliningand simplifying inshydirect taxes reducing the incidenceof cascading and

Volume 1 Number 4-5

bull Partially liberalizing own-exshychange imports particularly for comshymercial vehicles which are badly needed in the private sector where there is very limited access to official foreign exchange

To stimulate exports the government is considering duty-free export proshycessing and the creation of a revolvshying fund of foreign exchange for ex- porters

It is too early to tell if these reforms will work There are some profitable opportunities in commercial fanning especially in livestock products for sale in urban areas and some peasant farmers secure in their holdings and freed from the obligation to seUlowshypriced quotas ofgrain to the state are likely to improve their farms and exshypand their output In other sectors the economy will be more sensitive to a macroeconomic context in which inflation is Ukely to mount from a historically modest level as a conseshyquence of a recent relaxation of conshytrol over the fiscal deficit Reverses in the cripplingly expensive civil war may defer the revival ofprivate seetor confidence The output response will also be muted and may in some secshytors be negative until reform creates adequately functioning markets in labor capital and foreign exchange Even then the response will be disshytorted as long as the protection of foreign exchange rationing and high import duties persist Export growth will be restrained as long as the exshychange rate is overvalued and while the price structure is dualistic

A key impediment to growth in the formal sectors arethe labor laws which makeitvirtually impossible to dismiss staffand which for many years have dissuaded private sector employees from engaging personnel The finanshycial sector is monolithic and highly special~ed Its vocation is mainly but not exclusively to finance the public secto In a country where all land remains government property the reemergent public sector will have problems in establishing ita creditshywortbinessand in putting up adequate collateral

Themost acute and binding restraint on a supply response is however that

11

of foreign exchange Not only the long-starved private sector butalso the hitherto privileged public serllr is unable to operate to capacity beshycause of foreign exchange shortages Meanwhile foreign investment is not likely to occur while there is no realistic prospect ofremittingpronts

These problems of factor market opshyeration and access can be overcome through legislative administrative and exchange rate action albeit not without some political difficulty lhe government is open to the idea of some measure offactor market libershyalization and to the lessening of disshytortions

Adjustmentproblema in the state sector

It is in thestate enterprise sector that some ofthe most acute and persistent problems of adjustment are likely to occur The government has affirmed its readiness to restructure privatize and if neceSlary liquidate 11)s8shymaldng enterprises but it may exshyperience serious practieal difficulties in doing so Two main problems arise First is the widespread overmanning a speedy ending to this is ruled out by political considerations even if amendments to the labor protection laws make it legally possible The reform ofstate enterprises will probshyably have to proceed at the pace at which itispossible to retire redundant staff

Second competition from the private sector is increasingly likeJy to expose the inefficiencies of the state entershyprises taking marketshareaway from them and causing financial Josses for hitherto profitable enterprises This is because state enterprises are unshyable to control their costa and cut their overheads to the level of busishyness they are able to attract State enterprise reform is envisaged that will give management autonomy and responsibility for maldngenterprises profitable but this could well be inefshyfective so long as management has less than full control over costs Conshyversely where enterprise manageshymentcontinues to enjoy a high degree of monopoly power the dismantling ofphysical planningillikely to empt them to achieve profitability targets

JtiflAugut 1990

___ ______ ________ -1

The Worfd BanicCECSE

in the face of supply shortages by reducingoutputandincreuingprices

Delaying state enterprise reform in Ethiopia presents two dangers to the success of the adjuatment process First and more obviously inCleasing losses or falling taxable profits could upset the fiscal balance which has hitherto been reliant on substantial

transfers from state enterprises so jeopardizingmaeroeconomic stability Second the longer the process ofstate enterprise reform the longer will pershysist the misallocation of resources of 1abor capital and foreign exchan ge in f~vor of relatively inefficient producshyers at the expense of more efficient ones in the private sector As the rate ofde-manning the state enterprises

win be the determinant ofthe pace of state enterprise reform preparingfor and managing labor redeployment emerge as the most critical conditions of the long-term succesa of the ec0shynomic reform program

JOM ampberta AFZCO

On the World BankIMF Agenda

World Bank Supports Plan to Study Soviet Economy

World Bank President Barber Conable has offered his support for a proposal by the leaders ofthe worlds seven leading industrial nations the Group of Seven (07) to launch a study of the Soviet Unions economy

The proposed evaluation of the Soshyviet economy is a very positive move by the (Gmiddot7) summit leaders the Banks President said The experimiddot ence that our staffcan bring to such an evaluation of the Soviet economy would be very valuable he added In their communique the 07 leaders said they agreed to ask the IMF the World Bank the OECD and the desshyignated president of the European Bank for Reconstruction and Develshyopment to undertake in e10se conshysultation with the Commission of the European Communities a detailed study of the Soviet economy to make recommendations for its reform and to establish the criteria under which Western economic assistance could effectively support these reforms

MongoliaAppliesforMembenhip

Mongolia has appliedformembership in the World Bank the Intemational Development Association and the International Finance Corporation Mongolia has also appJied to become a member of the IMF

HUDgary Boosts Acentcultural Exports

Hungary will increase its foreign-exshychange earnings through a p~ject

JulyIAugust 1990

aimed at boosting production ofligrl cultural goods for export The World Bank is supporting the project with a $100 mil1ion loan Funds from the loan will be channeled to commercial banks through the National Bank of Hungary and re-lent to agricultural enterprises including individual farmers cooperatives and state farms to finance improvements in agro-proshyceasing facilities marketing operashytions and equipment needed to in- creaseand improve production ofcrops and livestock Trainingand teehni~ services win be provided to farmers and agricultural enterprises in marshyketdevelopment farm management business planning and other services to improve efficiency and reorient their operations toward a market economy

Yugoslavia Launches Major Highway Project

Yugoslavia is planning to invest $23 billion during the next two years to modernize and maintain its road netshywork The World Bank has approved six loans totaling $292 million to support the project which isdesigned to strengthen highway planning and maintenance upgrade roads to bolster economic activities and tourism and improve links with neighboring coun tries Othergoals include raising the quality of freight transport reshyducing travel costs and promoting environmental protection through reduced automobile emissions lhe project covers the republics ofBosniashyHerzegovina Croatia Macedonia Serbia and Slovenia and the provshyince ofV ojvodina Other finaneingfor

12

the project will come from local road revenues an earlierWorld Bankloan and other foreign sources

Project in ChiDa wm Benefit Poor Farm Familiel

Lowincome fann families in Chinas Hebei Province will benefit from inshycreased agricultural production and job opportunities under a project that is being supported by a Cledit of$l50

million from the International Deshyvelopment Association (IDA) The incomes of about 540000 farm famishylies are expected to more than double as a result of the project which inte alia aims at strengthening the management of water resources in Hebei Province in the northeast inshytensifyingtheproductivityofexisting low-yielding C1OpS and diversifying cropping patterns and improving reshysearch and extension programs

Ethiopia UpPRdel Livin Condition for the Poor

Residents in the poor neighborhoods ofAddis Ababa the capital ofEWeshypia win benefit from an urban deshyvelopment project designed to ease the citys chronic housing shortage and upgrade inadequate infrastrucshyture IDA is supporting the project with a credit of SDR $35 million About 43000 residents in the Kebeles neighborhoods - Addis Ababas poorest and most congested section covering 88 hectares - will benefit from upgraded houses road drainshyage facilities latrines public water fountains refuse containers streetJighting and public showers

VoIIme 1 Nlmbef 4-5

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SocIalsi Eccnomles n Trcnsltlcin The Watd BankC(CZE

Book and Working Paper Briefs

Alan Peacock and Han Wil1gerodt (edishytors) GERMANYS SOCIAL MARKET ECONOMY ORIGINS AND EVOLUmiddot TION MaeMillan Press London 1989 292 p

These essaya have been translated from the German to bring the views ofa group of German liberal economic and legal thinkers to the notice of a wider public bull This group at economists and lawyers came into prominence as a result of their influence on and participation in poetshywar economic policy in the Federal Remiddot public ofGermany when Ludwig Erhard was Minister for Economic Affairs and later Chancellor

Seventeen essaya have been lected to expreu the thoughts of the group who because oftheir commitment to designing the appropriate economic and legal order or system became known as Ordo-liber ala The esys deal with a wide range of contemporary problems such as the meaning of the social market economy the problema of owner employee and management interet the role ofthe pubshylic aectal the control of monopolies the problem at the welfare state and the need for Ifhelp and the role of the trade unions in industrial 8OCieti The reader will find e )11 dealing with tM more philOllOphicai qutMltion of whether capishytalistandcommuniat systems are moving closer together in their approach to ecoshynomic problems to mell an extent that they will eventually converge

~-----------------------------

From the Austrian daily Die Standard

Alan hatotlt ~Eucutiw DirectoroIM Douid Hunu Innitu EdinbUTBiamp ~ HQIIII WUlguodt ~ ~r 0 Economiu and 00shy

Dinctor if1M Institu for Economic Policy ot tIN Uniwty ofCol4gne (KiJlA) Gtnrumy

William A B)Td and Lin Qingsong (edi tors)

CHINAS RURAL INDUSTRY STBUCTUREDEVELOPMENTAND REFORM Oxford University Preas OxfordINew York 1990 44S p (A World Bank research publication)

A striking feature ofrecent economic demiddot velopment in China is the emergence of rural industrial enterpri run in some cues by local governments in others by private groups and individuals The pr0shyliferation and growth of the firms shymany of which show great nexibility and energy - have significantly increased personal incomes among rural Chine andhave begun to change the structure of the rural labor force Rural industry baa become the most dynamic part of the Chinese industrial aector

Thil book the product of a collaborative effort by ChineN and World Salt reshyarch81l examin the genesi institumiddot tional structure operations problem and proepecta of this grau-root industrial activity An unprecedented quantity and variety ofdata were gathered mostly in four repreeentative countie where local

VoUne 1 Number 4-5 13

government officiala factory managers andemployeel were internewedin depth The remits at the ruearch provide inshysightinto theeconomicpictureat the local level how firms are startedandoperated the relationshipe between 6rru and govshyernment at all levela and the present and potential contributions of nonlltate firms to rural development local finance living standards and emp1oyment Both 8UCC8IIIH and problema are illuminated through a number ofcue studi Afinal chapter compar81 Chineaerural indUlltry withanalogousenterpriinothercoun tries

Atllw Ii1M 0(1I1riIinrI Famplliom A Byrd - an _ill illllwChWaProgrom DWiIiDnAliG lUtIion TM World s-Jt Lin QUapong _ IMplIty director 0( 1M IIU1liluJit 0( amponomiu CMMa Aladcmy 0(Sodol Scw-

William B)Td and Alan Celb TOWNSHIP VILLAGE AND PRIshyVATE INDUSTRY IN CHINAS ECOmiddot NOMIC REFORM The World Bank Policy Reaearch and External Affairs Working Paper 406 Wuhington DC 1990 40 p

Next to the decoiJectivization of agnculshytun themotatrikingeconomic transforshymation in China since 1978 baa beet the rapid ~h of rural nonstate indWJtry Firms in this eector (referred to her as TVP) 8ft owned by a hierarchy of ocal government units below the county Ilvel towna(or townahipe) villages and pr0shyduction teems (or to a lr extent prishyVllteindividualsandgroupe) TVPsowned by townahip orvinpemments (that is notprivatelyoWned)aretermedTVCEa

Important both to industry and the rural economy TVP have been at the iorefront of economic reform They are marketshyorientedin termaofoutputandinputand becaue of their tiny home markets outshyward-oriented There appeare to be a clON nlationship between individual inshycomes and firmcommunity economic performance Moo inctividuala expect to stay in their firms for relatively lorg peshyrioda In eome ways TVPs seem ~ reshysemble the ao-called Z firma rather than private or ate enterprise

Community incentiv for promoting TVP antrang But their community orientation leada to certain problem reshymlting from the frqmentation of millshyket for capital and labor and the mule

________ ________ --11_

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Soda1st Economies In Trcnsitlon The WOIId BankCECSE

tiple sometimes conflicting roles ofcornshymunity governments Even if resources ani used efficiently within rural commushyni ties the immobiJi ty offacton ofproducshytion can lead to increasingly serious misalJ(Xations and inequalities among communities A gradual opening of capishytal and labor markets is a priority task in the next stage of reform Weakening the involvement of community governments in management ofrural industrialization is likely to be gradual and take a long time Astronger legal framework in which TYCEsand private firms can operate will be needed National government policy should be to minimize discrimination by government legal and regulatory appashyratus against TVPs and within the TVP sector against private enterprise The longmiddotterm goal should be elimination of differential treatment

Kang Chen CHINAS ECONOMIC REFORMAND SOCIAL UNREST The Washington Center for China Studshyies China Report Volume 1 In Washshyington DC March 1990 12 p

In recent years corruption inflation and income redistribution have caused great social discontent in China Although many believe the economic disorder was caused by the introduction of a two-tier pricing system the author contends that it basishycally resulted from inconsistent reform guidelinee The include (a) opening up the product market without establishing a factor market to ensure necesaary adshyjustmentofresource allocation (b) al tering the governments functions in economic managemen t without transforming orgashynizations that are still carTying out the old functions and(c)establishing a market system without the necesaary laws and reguiations to guarantee proper funcshytioning of the system In addition to a two-tier pricing system transfer of aumiddot thority to the l(Xal governments was anshyother direct result of the inconsistent reform guidelines All ofthe provided more opportunities for earruption conshytributed to economic diorder and pr0shymoted social unrest

Gottorm Schjelderup REFORfiNG STATEENTERPRISES IN SOCIALIST ECONOMIES GUIDELINES FOR LEASING THEM TO ENTREPRENEURS The World Bank Policy Research and External Affairs Working Paper 368 Washington DC 1990 33 p

Schjelderup discusses the reform ofstateshyowned enterprises in socialist economies by leasing them to entrepreneunJ He recommends lease payments to the state basedon fee schedulee from the principalshyagent literature The aim ofthe principal (the state) is to get the agent (entrepremiddot neurl1essee) to act in the states interest The state does so by rewarding the 8ents for observed actions and outcomes

What is the process of evaluation howshyever when the reform process is based on the fact that thestate isunable to ml11age its own enterprise efficiently Clearly the state has to rely only on observed outcomes

Despite the states inability to evaluate actions outcomes can be judged by a simple measure the firms profit level Using the firms profit level as a basis for sharing rules between the lessee and lesshysor Scljelderup offers advice on how to structure and implement fee schedules and on the institutional framework they require

David Burton and Jirning Ha ECONOMIC REFORM AND THE DEMAND FOR MONEY IN CHINA International Monetary Fund Asian Demiddot partment Working Paper WP19042 Washington DC 1990 21 p

Errorcorrection models ofthe demand for a range of monetary aggregates in China are estimated with quarterly data for the period 1983-88 The estimated modells fit the data reasonably well and appear to be relatively stable Money demand is found to be sensitive to changes in expected inflation In the case ofcurrency demand increases in the short term in response to an increase in expected inflation e en though there is a fall in demand in the longrun A-cash-in-advance explanation for this response pattern is suggested It is also argued that the estimation results taken as a whole provide indirect evishydence against theexisterce ofsubetan1ial repressed inflation in China during the sample period

Bela Balassa PERESTROYKA AND ITS IMPLICAmiddot TIONSFOREUROPEANSOC~

COUNTRIES The World Bank Policy Research and External Affairs Working Paper 1428 Washington DC May 1990 22 p

Perestroyka introduced in the Soviet Union to reform the economy after the -period of stagnation- under Brezhnev

14

involvee combining centralized planning with elementa of a market economy For it to succeed certain micro and macro conditions need to be fulfilled

As far as micro conditions are concerned one should emphasize the interdepenshydence ofrational prices decentralization profit maximization incentives and comshypetition For commodities produced doshymestically the establishment of ration prices requires thatpricesequate demand and supply This in turn neceuitates the decentralization of decision-rnaldng and profit maximization by the firm At the same time managers would have to be provided with appropriate incentives to ensure that firms maximize profita Finally there is need for competition to guarantee that profit maximization does not lead to the exploitation of monopoly positions and inflation

Various macroeconomic conditions also need to be fulfilled for perestroyka to succeed The government should aim at realistic growth rates eetablish abalance between investment and conaumption eliminate the overhand in the market for consumer goode and services and drastishycally reduce the budget deficit

At the same time the succeu orfailure of perestroyka will have implications for the succeea of reforms in the European 80shycialist countries And the performance of the economies will be affected by the inmiddot creased demand for quality in the Soviet Union But successful reform by the 80shy

cialist economies will help meet this deshymand to exploit the opportunities offered by the vast Soviet market

New Books and Working Papers McCarney Joseph Social theory and the crisis of Marmm Routledge Chapman and Hall 1990 200p

Stremlau John J After the cold war lMICurity and development The World Bank Washington DC 1990 42 p (The World Bank Policy Research and External Affairs Working Paper Strateshygic Planning WPS 377)

Pollard Alan (edit) USSR facia a ftCshyUN annuaJ 1988 Audemic International Pre 1990 535 p

Vokme 1 Nlmber 41-5

XxtaIst EcOlIlOnllel Trallltlton

Conference Diary

Housinl RefollD8

On June 1213 1990 the Infrastruc ture and Urbarl Development Depart ment of the World Bank organized a policy and research seminar on hous ing reforms in socialist economies atmiddot tended by government officials and reshysearchers from eight countries The inain objectives ofthe seminar were

bull to discuss recent experience in six socialist countries (China Czeeheeloshyvakia Hungary Poland Romania Yugoslavia)

bull to determine the extentofconsenmiddot sus on the sequencing of reforms

bull to identiry the meet critical areas for comparative research to support the housing reforms (We inUnt1 togive Cl mort tUl4iJlaquoI nporl on tIM Minor in one 0 tIM nut iu 0thU NewUtur)

SSRC Workshop on Soviet and Eastern European Eeonomics

From July 8 toJuly 191990 the Sixth Annual Social Science Reearch Counshycil Workahop on Soviet and Eat Euroshypean Economica wu held at the Unishyversity of Pittsburgh (The primary goal of theworkahop 1 to promote research in the field of comparative economic sysfems) llrisyears faculty included profeuors Herbert Levine (workshop cilirector) University of Pennsylvania Riehard Eriaon C0shylumbia Univ9rsity Michael Marreee Northwestern Lniversity Andrei Polotayev Institute for World Economy MilllCOw Jan Svejnar Unishyversity of filtt8burgh and George Breslauer (political sdenCM) Univershysity of Cali~iDnia Berkeley Junior partic-ipanta were meetly from AmerishyM univenritiesbut there were also Sovieta Poles and representatives from Czechoslovakia and Yugoslavia The papen presenteduta workshop coveTed the followiDl topics

bull modeling of~iDgenera1 equilibrium framewodr (among othshy

ers Martin Weitzman tnm Harvard presented his paper entitled Pme ditortio 0 nd hortD6e dIl(ormatiD or wMt happened to tM IOGpn

bull cycles in and incentives for inshyvestment and in particular modemshyization

bull the mlaquohanism of10ftbUdgetconshystraint redistribution and its conseshy

quences eg overmanning and delayed adoption of innovations

bull the augmented compensating variashytions model for the explanation of the interindustry wage differentials in the Soviet Union (stolen hours and materials augmenting the usual differentials in working conditionarequirements)

bull repressed inflation and coordination failure

bull firm behavior in lOCialist countries (Poland)

bull determinant of interregional mishygration in the Soviet Union and

bull Bayesian approach to modeling -market socialismmiddot

Forthcoming Conferences

Agricultural Reforms Augurt 29 to September 1 1990

In Budapest Hungary sponlkired by The World Bank and The National Bank oC Hungary co-sponsored by the Ford Foundation -Agricultural Reform in Eutem Europe It the USSR Dilemma and Strategiesmiddot

The conference has three objective to synthetize experiJllce to date with agrarshyian reform in socialist countries to idenshytify alternative strategies for reform and to identify key area ofresearch to facilishytate themiddot -an and implementation oC reform programs The conference will foshyCUll on the role of incentives organizashytional structures and policy both at the farm level and in the larger agricultural economy Participants will indude leadshying Eutem European SoViet and Westshyemeconomist8WelcomingaddreueswiU be deUvered by the new President of the Hungarian National Bank and by a high official of the World Bank the opening speech will begiven by a aenior memberof the Hungarian govemment

Contact peTlJOn at The World Bank Avishay Braverman Division Chief Agshyricultural Policies Division 1818 H Street NW Wuhington DC 20433 USA Tel (202) 473-0378 telefax (202) 334 0568

IDvestment Conference September 1012 1990

In BudapeSt Hungary an Investment Promotion Conference will be held which

is sponsored by the Multilateral Inshyvestment Guarantee Agency (MIGA) ofthe World Bank Group and the Minshyistry ofFinance ofHungary The main objectives of the conference are to inshyform participants about Hungarys inshyvestment policies and procedures and to assist the country in promoting speshycific investment opportunities in parshyticular in marketing 34 state entershy

middotprises selected for privatization in the BITO-proceaingandelectronicaaectors Participants will ielude bumneasmen bankers international experts and Hungarian officials Senior officials representing the World Bank the Inshyternational Finance Corporation the IMP UNIoo and the European Comshymunity will also attend

For further information contact at the MIGA Mr Samir Bhatia Sr Policy Advieor Policy and Advisory Services 1818 H Street NW Washington DC 20433 By telephone (202) 473-6164 telefax (202) 334-0266 telex 248423

Adjustment Lendina October 4-6 1990

-t1le World Banks Experience with Adjustment Lending LesSOlls for Eutem Europe- Ille conference is to be held in Pultusk Poland Orgarrlzshyen The World Bank (CECMG) and the World Economy Reeesreh Instishytute Central School of Planning and Statiatica University ofWarsaw

Technolocy Culture and Deshyvelopment October 26-27 1990

Conference on -rechnology Culture and Development The Experience of the Soviet Model- Farinformation JamP Scanlan Director CenterfoT SlavicandEutEuropeanStudies 344 Dulles Hall230 W 17th Ave Ohio Stat Univenity Columbus OH 432101311 Tel (614) 2928770

Transition to a Market Economy November 28-30 1990

OEeO-World Bank sponeored confershyence on Transition to Market Eccnomy in Central and Eutem Eubull ropeshy

Vokme 1 Nunber 4-6 15

__________ 11 ~MViImMmiddotIIic Ii_____~-~_~_I ___~ __middot

Socfallst EcQllOtTlles In Trcnsl110n The Woc1d 8cnkCECSE

Bibliography ot Selected Articles

Socialist Economies

MUMY CEfE E Mlc~o_mic recoashybull_ctioa or Moors labor rkt t_ry EaJIIDmuxa (UK) 67middot91middot106 February 1990

Eastern Europe

BONtMEmiddotBLACANDREA Eutel1l EuIOplaquo bullbullapip tllr OOOIIiltado_ Ink1ft4tiDll4I

~l4w lUiUN(UK)9-2amp31 March 1990

DYBA KAREL and KOUBA KAREL C_laoshyIo_k itempla t te ella 1958 1988 1988 CollUlWUUtt~ (UK) No 3313middot25 1989

CUIH ECKART Acri_Imreia EuleroEshyropea contrt_ Upampamp tilbullbullad 01 til tvI InkntDNgt (~ny Fed Rep) 2582middot7 MarchApril 1990

KLAIJS VACLAV 8oetut __1shynomic _ aacI __1DiaU aecdo_

or bull Caeclloalovk o_-e Comitt Eamolftiu (UK) No 189-96 1989

MABRESE MICHAEL Bnpria acrt_l tv -_ tor SoYt_ Ualoo eom pGIOIiM EagtMmiI amp1Idiu (US) 32 1515-69

MACHOWSKI HEINRICH Eooeoalc doaadnrloptoPoIancL amponomC Slktill Oeutach Intit Rlr Wirlllcban (anchllnl (Germany Fed Rep) 2711middot1 My 1990

NEWBERY DAVID M Tn ref trad Uberall_tloa aacI iadCrtaI ctart la a Centre Cor EcomomJc Policy R _rch OiilCWllllon PapeT Seri (UK) No 3711middot 36 February 1990

TMKE HANSmiddotHELMUT D bull lopbullbullaamp pollc la EMtel1l ENIM D C olopnNtlol

ond eoofMratiDIl (Germany Fed Rep) No 114shy151990

WHITESELL ROBERT S 1CMi__ 01 lila

otp - fro alloca IMftId~ bull compariloaorBnpryGerma ampukm ElgtIOfMOIl EoMIIIia (u8) 28~124 Winler 1989middot90

USSR

BELKIN V D t-_ ol tile PMe Probllt_ 0(

EamoItUOt (Us) 3261middot 70 January 1990

BROOKS KAREN Lea eontraett Ia So api_ltare la 198ICompolaiiEagtMmicamp~ (Us) 3285-108 Swnmer 1990

DERIABIN A A Leh lltart b correedac prtce formatloa Problil_ 0(~ (US) 322 aa January 1990

lUDIN I Eco__lc-- 01 red_

bull naecI r_ aad COD_loa 01 milU11T proshydUCdoa Problil_o(~ ajolUlUJlo(tIoNImiddot laliDM (US) 326-14 Mrch 1990

JOHNSON D GALE Paible Impacla ot acrtshyclmr1 trd IlberalluloD oa tbullbull USSa Comporati Economil amplidit (US) 32144-54 Swnmer 1990

KOMIN A N PrIce todOD aad ProbIiI_o(EagtnonUcor (US)3237middotJnwuy 1990

PAW LV and RADZIVANOVlCH KL 110 to CUI7 _t__Ie to polata oIad

~ltySoCIiftSludit(UKl4225-37Jan1lllry 1990

RUMER BORIS TIl -Abalbal_doo-oIsm1l -___ tcnw Problil_ o(eo_itm (Us)

3874-82 JanaaryWCbnaa1T1911O

R11lGAIZER V Mbullbullnd SHMAROV A I nd KlRICHENKO N V to oIretaU prt 1anJ_ olcoape_doand I_at oldie __r IICIOCU Probltt_ 0(Eagtshy

nonUcor (Us) 328-23 Jnwary 1990

nfORNBURGH RICHARD 80 Unto rale ot la Po Afoin (Us) 13-27 Sprinc 1990

VAN ATTA DON0_ Uk eoI~ doa bbullbull widloat ool1eeUudoa bullbull_ pelp to InlrodbullbulldI taal~ad Ie_

coatraet la 8oYlt crt_lm eomparatilll EamomilSludit (Us) 321OQ43 S~ 19110

Asia

CHEN TEmiddotSHENC Maialaod CIlaa _ nomic orm pollc la tbe ake 01 Fift Plen ot til CCI1I Tlalrtleeatia Cshyiral CoaltteeI~ Stw4iIt A J(J11Uft4 0(

CItiA4SturUa ond I nk1ft4tiollalAlfoinTaiw) 2625-42 Mrch 1990

HINION WlLLIAM TIle anat--I Ih priYadsadoa ot CIIIl- Unl Mlt1IIlItly UflW Prna (Us) 1990

JUDD ELLEN AJtanad dlop_at alraeep for __a to raral Clalaa 0

0PlfMnt ond CluuItlfl (NeamphcrIncIa) 2123-42 January 1990

MINC CHENG KAI Flaaactnced_tfoa la Mainland Clalna Iat tlla real prallshy1e_1 lu~ ond StlutM A JolUIUJI 0( CItiA4 SlIMiiit ond Ink~Alfoin (Taiwan) 2654shy75 March 1990

NIURENLIANCandZHAOJUN Sa_--rol tIIbull poooIoaCIII__ W __1IIAaa SociGl ill~

CAUIG (China) 119-19 March 1990

SANDS BARBARA N O-atnllalnc AD

---r til IOIe 01 b ncrade OOITII~ doa 10 Clllaa _aOaMI ref_ Publil C~ (Us) 6586-91 April 19110

SRIMVASAN T N Exwnal_tor I bull s-I shyoat Clal_ aaclladla l~AmfIiaM

EamomicjffluwPnondP~(Us) 80113-17 May 1990

WOONYUENmiddotFONGttoaaIUallaaacl tlae _I_talc d__lop_at 01 raral Clalbullbull1 bullbullbullalpat co__aU la

aaapo MotU CAWa (US) 16131J72 Apn1199O

CMEA

KOZMA JANOS -r p eo kobullbullpkltarop1 10

M bullbullneo (JIIe 11- 01 B_ft4IIUiaa - to bull CeEut ra p_I~1 lGtlmiSUMlt(HIIIIIUY) 311-8 June 1990

SOClALlST ECONOMIES IN TRANSITION is a regular publication for intemal UN ofthe World Bank Socialist Economiee Unit (CECSE) in the Bank Policy Reaeanh and External Relatieu complex The Ilndinp viewl and interpreutiou published iA the mile_ are thOle of the autbora and bould not be attributed to the World Bank or ita amUated organilatioEUI Nor do any or the iAterpretationl or coacluliou necesaarily repretent ofllcial pelicy orthl World Bank or orita Executive Directora or the COUDLrieI they rep~nt MatynVlace il Lb editor aDd the produC1ioD manapr To gee on the diRributioD list IeDdyour name and addrM to Mtyas Vlace RoomN6027 The World Bank 1818 H Street NW WaahiqtDn DC 20433 or call (202) 73-6982 Information on Upcomilll conferellOH on lIOCialist ecoDCImies indication orubjecta of pedal iAterest to our readera lettera to the editor and aDY other reader contribution are apprecited

JulyAugust 1990 16 Vokme Nlmber 4middot5

i

Soclallst Economies In Trcnsitfon ihe World BonkCECSC

stipends rentals and other current payments were converted at 11 All other claims were converted at 21 except liquid assets of individuals which are converted at 11 up to a ceiling of2000 4000 or 6000 Marks depending on age (children adults pensioners) The resulting conversion is thus 11 for current payments and an average of 1861 for future claims The conversion rate for current payshyments actually has only limited sigshynificance since prices and wages were de-controlled on July 1 (with some temporary exceptions eg rents)

Conversion of Marks for DM is carmiddot ried out exclusively through bank acmiddot counts With the currency union the FRGs Deutsche Bundesbank asmiddot sumes all central bank functions for the territory of the GDR as well It also takes over some of the personnel and facilities of the former State Bank of the GDR to implement the curmiddot rency conversion and monetary and credit policies

Currency reform has huge consemiddot quences for the balance sheets of fimiddot nancial institutions A substantial part of their liabilities is converted at 11 while almost all assets (ie public enterprise debts) are converted at2 1 leaving large negative net worth For this purpose an equalization fund is being created in the GDR It will allocate claims on the fund (bonds) as assets to financial institutions to cover valuation losses arising from the currency conversion plus shortfalls to meet the capital adequacy rules of West German banks The equalizashytion fund will pay market-related inshyterest rates on equalization claims

Economic union

The principal condition for the introshyduction of the monetary union was the simultaneous creation of a comshymon regulatory environment Its principal characteristics are set out in Article 1 of the German-German treaty as private enterprise compe tition free market pricing and free movementoflabor capital goods and services This does not exclude special forms of property or public participation in economic activities as long as there is no discrimination against private entities

JulyAugust 1990

These broad principles are further elaborated with respect to the role of enterprises intra-German trade exmiddot ternal trade structural altljustment of enterprises agriculture and the environment Enterprisesare~)have full independence over production investmentlaborrelations prices and the use of profits External trade policies are to be based on free trade principles and GATT rules with due regard for existing obligations with CMEA countries The objectives and laws of the European Community are to be gradually implemented in the GDR including the common agriculshytural policy Rapid structur~u admiddot justment of enterprises in the GDR will be promoted with the objective of improving productivity furthering private initiative creating a diversishyfied economic structure and thus laying the basis for more growth and secure jobs For new investments the environmental and safety regushylations of the FRG are to be applied while existing GDR facilities will be adapted to FRG regulations as soon as possible

With the economic union the main elements of the West German tax and budget system will also apply in the GDR although with some templ)rary altljustments and simplifications for the remainder of this year Almost identical penonal and corporate inshycome taxes value added tax customs tariff and a number of excise taxes ltalcohol tobacco petroleum products etc) became effective on July 1 Reshymaining taxes (eg property ta1t inshyheritance tax motor vehicle taxes commercia1tax) will be introduced on January 1 1991 as well as fully equivalent laws and regulations for all tax and budgetary matters The social security funds state entershyprises public utilities and local govshyernments will be separated from the central government budget and borshyrowing limits are stipulated for the central and local government budshygets for 1990 and 1991

Annex II to the treaty indicates which legal provisions of the Federa) Remiddot public were to become laws of the Democratic Republic by the tinle of treaty implementation (July 1 1990) These include the relevant banldng financial sector and insurance laws

2

the economic sections of the civil code the commercial code the joint stockshyand limited liability company laws the merger and acquisition and the monoPGly and fair trade law and lashyborlaws

A number of transitional measures have been agreed upon ~ assist GDR enterprises to altljust These include (a) quantitative restrictions on imshyports of certain agricultural products in~ the GDR to be phased out over two years (b) a temPGrary imPGrt duty of 11 percent in the GDR on certain consumer durables (c) an inshyvestment subsidy of 12 percent for the first year and 8 percent for the second year after the economic union provided from the GDR budget and a reduction of the value-added tax in the Federal Republic for imports from theGDRby 11 percentagepointsdurshying 1990 and six percentage points until June 1991

Social union

In accordance with the Gennan conshycept of a middotsocial market economy the

social union is an integral part of the monetary and economic union It coven in particular labor relations and a comprehensive system of social security The principles of labor reshylations ~ be applied in the GDRare to be equivalent to those in the FRG These include freedom of association au~nomous wage setting the right to strike worker participation and co-determination and some protecshytion against job termination The GDR will introduce a system of social security equivalent to that of the Federal Republic including retireshyment medical accident and unemshyployment insurance with the same benefits and contribution rates as in the FRG As contributions to unemshyployment and retirement insurance are expected to fall short of expendishytures for SOlQe time the Federal Reshypublic will provide financial assisshytance ~ cover the difference during a transition period

The existing public health care system will continue for the tim being but will be altljusted gradually ~wards the structures prevailing in the FRG by permitting the establishment of private health care providers (doc-

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12







VoIIme 1 Nlmbef 4-5

bullbullbull

bullbullbull






~-----------------------------















________ ________ --11_

bullbullbull

bullbullbull

bullbullbull

bullbullbull














14









Vokme 1 Nlmber 41-5


Conference Diary

Housinl RefollD8





































Socialist Economies


Eastern Europe














USSR


















Asia















CMEA





i

bullbullbull

bullbullbull






~-----------------------------















________ ________ --11_

bullbullbull

bullbullbull

bullbullbull

bullbullbull














14









Vokme 1 Nlmber 41-5


Conference Diary

Housinl RefollD8





































Socialist Economies


Eastern Europe














USSR


















Asia















CMEA





i

________ ________ --11_

bullbullbull

bullbullbull

bullbullbull

bullbullbull














14









Vokme 1 Nlmber 41-5


Conference Diary

Housinl RefollD8





































Socialist Economies


Eastern Europe














USSR


















Asia















CMEA





i


Conference Diary

Housinl RefollD8





































Socialist Economies


Eastern Europe














USSR


















Asia















CMEA





i




Socialist Economies


Eastern Europe














USSR


















Asia















CMEA





i

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