TRANSITIO THE …siteresources.worldbank.org/INTTRANSITION/Newsletters/...TRANSITIO THE NEWSLETTER...

TRANSITION THE NEWSLETTER ABOUT REFORMING ECONOMIES

Volume 10, Number 4 The World Bank in collaboration with The William Davidson Institute August 1999

Development Research Group The World Bank The William Davidson Institute

http://www.worldbank.org/html/prddr/trans/WEB/trans.htm http://www.wdi.bus.umich.edu

What’s Inside

A Changing Development Landscape: Globalizationand LocalizationWorld Development Report 1999/2000by Shahid Yusuf

G lobalization entered the develop-ment discourse in the early1980s. Now it is common cur-

rency and denotes the integration of mar-kets for goods and factors of production,along with the increasing commonality ofstandards and consumer tastes. Startingin the 1980s many countries began dis-mantling controls on the movement of capi-tal and adopting a more favorable stanceto foreign direct investment (FDI). Declin-ing transport costs and advances in com-munications and information technologytightened the integration of goods andcapital markets.

Getting Global . . .

The Uruguay Round in 1994 significantlylowered trade barriers and enlarged thegambit of trade liberalization to include ser-vices, intellectual property rights, agriculturalcommodities, and textiles while anchoringthe new rules of the game in the World Trade

Organization (WTO). The adoption of com-mon rules to regulate banking and financialreporting lent further momentum, as did thecreation of the World Wide Web and aninternational movement toward productstandards like the ISO 9000.

Greater receptivity toward FDI and the easeof transactions over long distances inducedcompanies to reorganize their activities,slice up the value-added chain, and distrib-ute production facilities across markets.This spatial diffusion and the widening ofmarkets are behind the proliferation of pro-duction networks, which allows firms to spe-cialize, focus their research efforts, andleverage their scarce managerial and mar-keting skills. Cross-country production net-works have reinforced the impulse releasedby the liberalization of trade and the removalof barriers to capital mobility.

Even with these changes, globalizationmight have remained a weak force were it

World Development Report 1999/2000: Entering the 21st Century explores the avenues for institutional change and cataloguesthe major issues confronting the world in the early 21st century. These issues include macroeconomic instability resulting fromopenness, decentralization, rapid urbanization, and climate change. Both globalization and localization will shape the developmentlandscape in the early 21st century. Both forces have a long, albeit somewhat fitful history. The response of nation-states to thesetwo forces will determine whether incomes in low-income countries converge with those of industrial countries and whether efforts toeliminate poverty from tomorrow’s world are ultimately successful.

What Went Wrong in Ukraine? 3

Unsolved Governance in China’s SOEs 5

Migration in Transition Economies 8

Developments in Russia• Money Laundering Scandal 11• Conglomerates and their Future 14• Survival Strategy of 12 Oligarchs 16• Reader’s Forum: Stealing the State 17

UNDP Report— Transition’s Dark Side 19• Human Development Ranking 21

Overhaul of Statistics in TransitionCountries 22

William Davidson Institute 25–31

Women’s Issues in Eastern Europe 32

World Bank/IMF Agenda 33Milestones of Transition 35New Books and Working Papers 37Bibliography of Selected Articles 43

2 TR A N S I T I O N, Au gu st 1999 © 1999 The W orld Bank/The W illiam Davidson Institu te

not for a seismic shift toward market-based economies and democratic formsof government symbolized by the tearingdown of the Berlin wall. This rise of politi-cal participation also feeds centrifugalpressures within nation-states.

Membership in the WTO increased from102 countries in 1990 to 134 in 1998.Trade in goods and services rose twiceas fast as gross domestic product (GDP)during the 1990s. By 1998 FDI in devel-oping and transition economies reacheda net $155 billion— 16 times larger than in1990. International trade that flows throughglobal production networks is now one-third of total trade. One dark side of glo-balization, however, is the rapid spread ofharmful substances and pollutants.

. . . and Local at the Same Time

Nation-states increasingly focus on supra-national issues such as globalization, whichcircumscribe their choices. Simulta-neously, localization is forcing states totake note of subnational dynamics andaccommodate demands coming from thelocal level.

Localization demands autonomy and apolitical voice for regional and communityneeds. It has many motives, including:

• Dissatisfaction with the state’s ability todeliver on development promises.

• Strength of local and ethnic identity, re-inforced by education, better communica-tions, and the rising concentration ofpeople in urban areas.

• Desire to deepen the sense of belong-ing somewhere in a world in which global-ization levels cultural differences.

• Sharpening competition amongsubnational units in an open environ-ment, along with the reluctance of richerentities to share their resources with lesswell-off neighbors.

The pull of local identity is manifestedthrough the following developments:

• Nation-states multiplied from 96 in 1980to 192 in 1998.

• The process of political and functionaldecentralization— pointing toward partici-patory democracy— is continuing in largeand small states. Half the countries thatdecentralized also devolved major func-tional responsibilities. In many countries

of Eastern Europe and Central Asiasubnational governments evolved follow-ing the collapse of the earlier autocraticregimes.

• Urbanization is continuing by leaps andbounds. At the turn of the 21st century halfthe world’s population will be living in ar-eas classified as urban. As recently as1975 this share was just over one-third; by2025 it may rise to almost two-thirds. Whilethe rate of urbanization has passed itspeak in the higher-income countries ofEastern Europe, the transition is just be-ginning in Asia and Africa. An increase ofalmost 1.5 billion people is expected inurban populations over the next 20 years.While the public sector is likely to remainthe key player in planning urban develop-ment and providing basic services, part-nerships between the public sector,nongovernmental organizations (NGOs),and private entities have become an im-portant source of capital, skills, manage-ment, and initiative throughout the world.

Gains and Risks

Globalization and localization promise in-creased availability and more efficient al-location of resources, freer circulation ofknowledge, more open competition, andimproved governance. But there are down-sides and risks as well. Globalization en-tails greater exposure to external shocksand capital volatility— recently highlighted bythe East Asian crisis— along with numer-ous environmental consequences. Mea-sures to decentralize in order to satisfy localdemands can lead to macroeconomic in-stability and lack of fiscal prudence. On theother hand fiscal rules can buttress politi-cal autonomy by assigning revenue bases,responsibilities, and prescribing revenuesharing arrangements between the centerand localities. Efforts to raise urban livingstandards could prove elusive if policiescannot prevail over the spread of poverty,violence, and squalor.

Recent strides in development thinking havebegun to define a pragmatic agenda of insti-tution building and policies that exploit thegains and contain the risks from these twoforces. For example, rules for fiscal decen-tralization can establish the sharing of respon-sibilities between central and subnationalgovernments. All change courts risk. Thedownside of globalization and localization isstarkly apparent from the East Asia crisis andthe state-induced fiscal crises in Brazil. Theseforces are generating much of the stimulusbehind development. Minimize the risks andensuring that development is stable and sus-tainable are the objectives to strive for. As thisreport shows, the road to such a desired fu-ture is paved with good institutions.

Excerpted from an article to be publishedin the IMF’s Finance and Development.Shahid Yusuf is staff director of the WorldBanks’ DECWD team, in charge of prepar-ing the World Development Report 1999/2000 to be published in mid-September.Web site: http://www.worldbank.org/wdr/2000/home. htm; Email: world_development _re-port @worldbank.org.

© 1999 The W orld Bank/The W illiam Davidson Institu te TR A N S I T I O N, Au gu st 1999 3

What Went Wrong with Foreign Advice in Ukraine?by Vira Nanivska

After Ukraine gained independencein December 1991, the generalview was that it had great eco-

nomic potential. Already blessed withwell-educated people, abundant naturalresources, relatively well-developed in-dustry and agriculture, Ukraine’s geo-graphical location in the heart of Europewas also advantageous for world trade.

Lowering High Expectations

Instead of reaching this great potential,however, Ukraine endured one of theworld’s worst depressions in modern his-tory. Even among the struggling countriesof the former Soviet Union, Ukraine standsout as having one of the longest and deep-est periods of economic decline— one last-ing for nearly nine years and with acontraction in GDP of more than 60 per-cent.

The effect of this economic downturn onthe people has been severe. Most Ukrai-nians live on less than half the income of afew years ago. At least 30 percent— andperhaps up to 75 percent— of families nowlive below the poverty line. Sickness frompreventable causes is rising, death ratesare climbing, life expectancy is falling, andthe population is shrinking.

Poor policy decisions and the lack of asound economic strategy have exacer-bated the economic decline in Ukraine.While the president and government havearticulated a clear, medium-term economicpolicy, its implementation bears little re-semblance to its vision. As a result,Ukraine has stumbled from one crisis to

another, and the government has beenbogged down in putting out fires.

While reformists did not have the neces-sary skills, experience, or resources to de-fend their course, well-organized oppositiongroups rapidly attracted financial resourcesand retained social support by successfullyusing familiar Communist slogans.

Burden of the Soviet Legacy

The international community tends to believethat lack of political will by Ukraine’s presi-dent and government is the unique cause ofthe inadequate reforms and economic strat-egy. This ignores the other reason: the gapbetween the design of foreign technical as-sistance programs and the institutional real-ity in countries of the former Soviet Union.

For a long time international donors be-lieved that the post-Soviet Ukrainian gov-ernment had both the mandate and thecapacity to make reform decisions. Donorsbelieved that once the Ukrainian govern-ment was advised it would take the lead inreforming economic and social institutions.They further believed that once state con-trol was removed and Ukraine had beengiven the right recommendations, civil so-ciety would automatically become activeand independent, and enterprises wouldcooperate with foreign investors followinggenerally accepted business rules. Giventhese assumptions, donors saw their rolesolely as advising the government on re-forms and supporting the transition finan-cially. However, the government lacked theskills needed to fulfill its new role in a mar-ket economy.

During the Soviet period the Ukrainian gov-ernment did not have any real governingresponsibilities; rather, it was fully engagedin the distribution of resources and the di-rect management of a huge, country-sizedproduction line. No policy formulation wasnecessary— all decisions were made by theCentral Committee of the Communist Party.The Ukrainian government’s role was toexecute those orders.

But after the collapse of the totalitarianregime— and in order to function properlyin the new democratic arena— the Post-Soviet Ukrainian government was ex-pected to justify its decisions, predict theirconsequences, and prove why they werebetter than the alternatives. Analytical andpolitical justifications should have beenpresented to win public support. But thegovernment machine was unable to copewith the challenges of transformation—neither substantively (what to do?) normanagerially (how to make it happen?).Even during the present reform process,no new capacities to fulfill such tasks havebeen developed.

The government also lacks the ability toeffectively communicate reform to theUkrainian people. The basic principles ofa market economy and the rationale for re-forms have yet to be explained, nor hasany future prosperity been linked to the suc-cess or failure of these reforms. Voucherprivatization, for example, was promotedas a liberal-socialist equity measure aim-ing at the “fair redistribution of state prop-erty.” However, those not involved in privatebusiness— including public servants,teachers, doctors, pensioners, and sol-

Reform in Ukraine has been greatly hampered by its government’s lack of institutional capacity for policymaking. The reformprocess was conceived, designed, and guided by donors. So what went wrong? Somehow the political will to go the “Western way”did not manifest itself in concrete policy decisions. The government lacked the institutional capacity to make radical politicalchoices. To fix what has already gone wrong, Western technical assistance must be reassessed and shifted to enable Ukrainians toinitiate their own institutional capacity building.


diers— did not see the benefit from thechanging ownership of shops and facto-ries and thereby did not become allies ofreform. Thus there was no public pressureto introduce transparent bankruptcy pro-cedures.

Ideally, the institutional mechanism of theUkrainian government to carry out reformsshould include:

• Employing qualified experts for profes-sional policy analysis, especially researchon the possible short- and long-term con-sequences of suggested decisions.

• Evaluating the public costs of ignoringthose decisions and of reinforcing them,and comparing these decisions with de-fined goals.

• Managing change by establishing adepartment of reform management that isable to formulate reform strategy, differen-tiate process from substance, identify driv-ing forces and opponents of reform,develop action plans, and build politicalsupport throughout the country.

• Putting organizational procedures inplace to provide extensive support for gov-ernment reform policies, including an offi-cially structured system of communicationwith the Parliament, as well as proceduresand documents that fulfill the principle ofgovernment transparency for the public.

Donors’ Miscalculations

Foreign technical assistance to date hasnot helped to develop Ukraine’s analyticcompetence inside and outside the gov-ernment. Recommendations offered to thegovernment by groups of foreign expertswho conduct their own research cannotdirectly be used with any great or lastingeffect on Ukrainian policymaking.

Why was the approach more successfulin the Central European countries than inUkraine? In Central Europe the focus has

been on European integration. In thesecountries institutions were developed toallow integration into the European Union(EU). Together with their Western coun-terparts, government officials in CentralEurope adjust their institutions to EU stan-dards, which is stipulated in technicalassistance projects.

In the former Soviet Union technical assis-tance has aimed at consulting, advising,and sharing information, not institutionbuilding. The first project of public admin-istration reform in Ukraine started in late1997— compared to 1991 in Poland.

Considering the overall high level of edu-cation, the Ukrainian government has fewspecialists with the knowledge and exper-tise necessary for government work in ademocratic, open, and transparent soci-ety. Most public servants lack the skillsneeded to give strategic advice to the gov-ernment.

Technical assistance in Ukraine has fo-cused on advice rather than on teachingUkrainians to develop and formulate policyadvice. Frequently, foreign consultants donot promote the transfer of knowledgebecause they are expected to provideadvisory service. Thus they are opposedto guiding, consulting, and supervisingUkrainians to do the same. As a result, allparties are frustrated— the foreign advi-sors because Ukrainians do not followtheir advice, the Ukrainians because theywere not helped to deal with their problems.Ultimately, the government is unable toevaluate foreign advice— let alone imple-ment it. Like the fictional character BaronMunchausen, the Ukrainian government isexpected to drag itself by its own hair intoa new role.

More Training, Less Advising

On the contrary, Ukraine has paid a highprice for early democratization, which hasnot been matched by the government’sinstitutional capacity to take reform deci-

sions in the presence of opposition andfreedom of speech. Market forces, embed-ded in people’s vested interests, thrive inUkraine. Private initiative is far ahead ofregulatory framework, and a “shadoweconomy” makes up 60 percent of GDP.The problem lies in the reform design. Thisdesign did not account for the Soviet insti-tutional legacy and for the market behaviorof people who instinctively make moneywherever possible and who are unwilling towait for the proper and correct legislationor procedures to be in place.

Ukraine, therefore, needs to build on ex-isting societal forces instead of fightingthem. The international development com-munity needs to advise on the reform pro-cess as a special policy craft, both inconcept and implementation. Projectsshould be designed to facilitate new gov-ernment functions.

Training programs must also be restruc-tured so that Ukrainians can initiate theirown development. Ukrainian partici-pants need substantive training, includ-ing continuing study programs afterreturning from abroad. For now theseoverseas programs do little more thanprovide sightseeing tours. Technical aidalso needs to be aimed at helping Ukrai-nian institutions to ask the proper ques-tions, find the answers, and thus beself-supportive in the decisionmakingprocess.

Vira Nanivskar is Director of the Inter-national Centre for Policy Studies(ICPS), Kyiv. ICPS is a nongovernmentresearch organization operationally fi-nanced by George Soros’ Open SocietyInstitute. ICPS conducts independentresearch and organizes dialogue be-tween the public, the government, NGOs,foreign experts, and the media. Its peri-odical Quarterly Predictions provideseconomic commentaries and forecasts.ICPS produces and disseminates theRussian language version of our Tran-sition Newsletter.


How to Better Manage China’s State OwnedEnterprises?by Weian Li, Lidong Wu, and Yashuang Zhang

T he corporate governance ofChina’s state-owned enterprisesis gradually changing from admin-

istratively controlled to market driven. In thehighly centralized planned economy, gov-ernment and enterprise functions were notseparated. Businesses were governmentaffiliations, or state-owned enterprises,and lacked the necessary rights and vital-ity of an independent entity. As a result, en-terprises were inefficient, with elusiveperformance responsibilities. Reformsstarting in the late 1970s were not enoughto cure the ailing state enterprises or toallow an efficient governance mechanismto develop.

While the means of government controlchanged— from physical indicators to fi-nancial regulators— the authorities werestill unwilling to give up supervision of theenterprises’ activities, including invest-ment policies, production mixes, and long-term development plans. The government,as owner, made the decisions, and themanagers or factory directors executedthese decisions. Managers of the enter-prises’ day to day operations thereforelacked incentives for preserving and in-creasing enterprise value.

Who Controls Whom?

With the contracting-out system, the own-ership and management of the enterprise

were formally separated under formalcontracts (managers gained some au-tonomy and became more motivated toincrease production), but the administra-tive nature of governance did not change.The government— the external gover-nance in this system— controls personnelaffairs, appoints and evaluates manage-ment, and scrutinizes overall businessperformance. The internal governance inthis system is a structure of checks andbalances among three power centers:

• Enterprise directors or managers takecharge of the daily production and man-agement.

• The secretary of the Communist PartyCommittee is responsible for the person-nel and the party affairs, as well as super-vision of the enterprise operation.

• The Workers Council represents staff inthe enterprise management.

This governance pattern is efficient only if:

• The government exercises effective su-pervision over the enterprise.

• The enterprise director or manager is aperson of high principles.

• The party secretary and the WorkersCouncil provide checks and balances

against the power of the enterprise man-ager.

These prerequisites are not met, for a va-riety of reasons:

• During the process of broadening enter-prise autonomy, the government stays outof an enterprises’ affairs and real controlshifts to the enterprise managers. Due toan asymmetry of information, the govern-ment is unable to determine whether exter-nal factors or a manager’s successes orfailures cause a certain outcome. Reward-ing or penalizing managers is biased andinefficient at best. Supervision of enter-prises needs to be made more efficient, butbringing the enterprise back under full gov-ernment control is not a realistic alternative.

• Enterprise directors and managers pur-sue personal interests— often this meansmaximizing their own economic gains.Without adequate supervision, adverseselection and moral hazards are the result.

• Since the party secretary and the fac-tory directors or managers have commoninterests, collusion among them is hard toavoided— often, the factory manager andthe party secretary are the same person.Supervision by the Workers Council iseven more ineffective since the staff de-pends on managers for their salaries, wel-fare, and promotions.

Beijing, a city with an unprecedented construction boom, was the location of the “4th Annual International Conference on Transi-tion Economies” in late July, sponsored by The William Davidson Institute of Ann Arbor, Michigan, the London-based Centre forEconomic Policy Research (CEPR), and the National Center for Economic Research at Tsinghua University, Beijing, in coop-eration with the World Bank and the Ford Foundation. The conference covered a broad range of transition issues, including theexperiences of Central and Eastern European transition economies and the lessons gained that can be useful for China’sscholars and policymakers. The following article analyzes the corporate governance dilemma of China’s state-owned enter-prises. Incorporation and mixed ownership (through selling stocks to banks and other investors on the stock exchange) cancreate favorable conditions for introducing modern, market-driven corporate governance in China. Transition newsletter willcome back to the conference debate in the future issues.


Clearly, a new governance pattern isneeded in China, but it needs to be ap-plied under the right conditions. Selectedenterprises are experimenting with theshareholding system. However, two prob-lems are already apparent. First, due tothe special characteristics of listed com-panies in China, stocks are concentratedin the hands of state authorities or of legalentities approved by the state. Majoritystock owners— with a huge concentrationof shares— thus have unmatched power todominate shareholders’ meetings, boardsof directors, and managers. Thus the for-mal separation of power is illusory. Sec-ond, enterprise governance should providefor an efficient decisionmaking process.The new system does little to improve theprocess, although it appears to be tightlystructured and well coordinated. Theshareholders’ general meeting is pre-vented from serving its proper function bythe enormous power of the board of direc-tors, while the second-tier board of super-visors is too weak to have much influence.

Limited Shareholders’ Role

A recent firm-level survey found that in 85percent of state enterprises the generalmanager has assumed full responsibilityunder the direction of the board of direc-tors (75 percent) or the board of supervi-sors (10 percent), while 15 percent ofcorporations are either run jointly by theboard of directors and the party commit-tee (12 percent)— the committee assum-ing responsibility for decisions— or by thegeneral manager under the direction of theparty committee (3 percent).

The survey also found that the board ofdirectors (selected from high-level execu-tives) overwhelmingly dominates thedecisionmaking process, initiating pro-posals and participating in discussions.The worker directors, the board of super-visors, and the ministries have more of asupplementary function. Efforts have beenmade to give a greater role to worker di-rectors and “outside” directors, appointed

by the authorities, and to protect the inter-ests of the minority shareholders. Thismore market-driven corporate governancestructure still suffers from several problems:

• The shareholders’ control in many en-terprises is rather limited. Their major roleis to decide how much of the dividendsshould be distributed each year. Share-holders do not select members of theboard of directors, which in many com-panies is established before the share-holders’ general meeting. Often directorsare government officials who had previ-ously managed the company from theirrelevant ministries. The government ap-points the chair of the board of directorsand the general manager. In some prov-inces local authorities simply remove di-rectors and the chair if unsatisfied withthem. Thus even listed corporations arecontrolled more by the government thanby the shareholders. A standard mecha-nism has yet to be established.

Despite this formal system, external gov-ernance mechanism remains ineffective.The government is unable to properly su-pervise enterprises because asymmetricinformation provides ample room for in-sider control.

Internal governance is also weak. Mostshareholding corporations have no inter-nal supervision mechanisms. Workerslack efficient access to the managementof a corporation. Supervisors come fromthe corporate auditing, accounting, and ad-ministrative staffs. This arrangementmakes collusion with managers far morelikely and nearly eliminates any the chancefor independent supervision. In most cor-porations the general manager and thechair of the board are the same person,significantly undercutting the supervisoryrole of the board.

We base our recommended corporategovernance model on the principle of jointgovernance and joint decisionmaking byall the interested parties.

• Worker participation in managementshould be encouraged. Participation en-sures the sustainable development of theenterprise, binding the future of the firm tothe well-being of its employees. Likewise,the position of worker directors and theirparticipation with the board of directors andboard of supervisors should be regulated.Worker directors and worker supervisorsshould be selected by the Workers Council.

• Supervision of enterprises should bestrengthened by introducing outside super-visors such as auditors and accountants.At present, most supervisors are chosenfrom the ranks of corporate managers.

• The independence of nonexecutive direc-tors— experts, scholars, or experienced en-trepreneurs— whose participation is invitedby the shareholders should be reinforced.

Needed: Capital Market

An effective corporate governance mecha-nism assumes the existence of a function-ing, efficient capital market. China’s capitalmarket is rife with speculative activities dueto ambiguities in regulations, loose super-vision, and lack of a modern enterprise sys-tem. Strong measures must be taken to getthe stock market back on the right track.

Managers are important human re-sources in modern corporations. Thepractice of having government depart-ments appoint managers should bestopped and a market for high-level man-agers should be established. Intermedi-ary companies (head-hunter firms) shouldbe established to find individuals withmanagement talent. Managers should beselected on the basis of fair competitionand market testing.

The current banking system in China doeslittle to improve the efficiency of corporategovernance. Loans are still allocated on anadministrative basis, providing little corpo-rate discipline. Assuming that China intro-duces the German or Japanese model of


In the early years of transition, observers spoke of choosingbetween different models of capitalism— particularly betweenAnglo-Saxon stock market capitalism and the German modelof more concentrated ownership that permits commercial banksto hold enterprise shares in their assets. The corporate struc-tures that have emerged in practice borrow elements from dif-ferent models of capitalism. A decade of privatization has haddifferent effects on corporate governance. Several problemshave emerged:

• Crony capitalism. Several countries are just beginning tounravel the webs of crony capitalism that have been built up asa result of partial privatization and political favoritism. In par-ticular, the Czech and Slovak governments are trying to undothe work of their predecessors. By contrast, front-runners of tran-sition— like Hungary and Poland— have relatively good corpo-rate governance, as evidenced by the level of industrialrestructuring and competitiveness. However, market supervi-sion is still not entirely trusted by investors even in these pre-ferred investment destinations.

• Iron triangles. Across Central Europe there is still much tobe done to dismantle the iron triangles that have been built upamong firms, banks, and the state. Soft credits have been pro-vided to many failing enterprises through these links, even afterprivatization.

• Management abuses. Managers and boards are often re-luctant to cede control, preferring to retain control of failing busi-nesses rather than allow foreigners a chance to improveenterprise performance. Also, a general lack of transparencydeters investors, especially after revelations over the past twoyears of the extent of the “tunnelling” used to strip Czech firmsof their assets after voucher privatization. Boards are still reluc-tant to give out information, while local accounting standardsare often well below international norms. Moreover, rules onshareholder liability are frequently unclear.

• Interfirm networks. Interenterprise links are a key concernin improving corporate governance, particularly among smalland medium-size enterprises. At the start of transition, informal

Corporate Governance in Eastern Europe— A Survey by Oxford Analytica

networks among firms— and among firms, banks, and parts ofthe state— compensated for the structural shortcomings of theformal organization of the economy, keeping the economy run-ning in times of political paralysis. These informal networks, how-ever, have also exacerbated structural shortcomings by bypassingregulatory controls and allowing anticompetitive links to flourish.

A prerequisite for improving corporate governance is the use ofmarket mechanisms to force underperforming firms to changemanagement practices and failing firms to exit the market. Al-though the rudiments of these mechanisms are in place acrossCentral Europe, they have not been widely used. The number ofserious takeover bids is still small. Shareholder activism lookslike a distant prospect, given that supervisory boards are weakand market supervision is well below Western European stan-dards. Regulators have been slow to respond to these problems.

Central Europe’s equity markets have not recovered to a levelclose to the highs achieved before the Asian and Russian cri-ses. However, some efforts are being made to improve inves-tor confidence, such as:

• Legal reforms are being introduced to allow hostile takeovers.Hungary has recently introduced a takeover law, ending a situ-ation in which firms could write “poison-pill” clauses into theirstatutes to ward off hostile bidders.

• The Czech Republic is reforming its bankruptcy rules so thatthey can be used to force market exit.

• Abuse of minority shareholders is being addressed throughlegislative change, as in the substantial protection provisions in-cluded in this year’s overhaul of Slovakia’s financial regulation.

Based on a recent report of Oxford Analytica, the Oxford-basedinternational consulting firm. Information: Oxford Analytica Ltd,At Pasley Tyler, 42 Berkeley Square, London, England, W1X5DB; Tel: 44171-318-0800; Fax: 44171-409-369; UnitedStates address: Oxford Analytica Inc., 1750 K Street, NW, Suite800, Washington, DC 20006; Tel: 202-872-241; Fax: 202-429-7030; Email: [email protected].

the main-bank system— allowing banks toaccumulate part of their assets in enterpriseshares— reform of China’s banking systemshould create a new relationship betweenenterprises and banks and improve the ef-fectiveness of corporate governance. Thisreform would require commercialization, or

incorporation, of existing banks and the es-tablishment of new banks, encouragingcompetition in the financial sector.

*The survey was carried out in 1997, sup-ported by the State Committee of Eco-nomics and Trade and the International

Business School of Naikai University,Tianjin Province, through random sam-pling of 300 of the 745 listed companies.Weian Li is Dean, Lidong Wu andYashuang Zhang are PhD students ofeconomics at the International BusinessSchool, Nankai University.


Ethnic Unmixing and Forced Migration in theTransition Statesby Tim Heleniak

T he recent episode of ethnic cleansing and forced ethnic migration inKosovo is, unfortunately, all too

common among the transition states ofEurope and Asia. The emergence of newindependent states— many resulting fromthe breakups of the Soviet Union and Yu-goslavia and the liberalization of politicalregimes across the region— has spawneda number of different migration streams,many of them forced. Each of the transi-tion states has become more ethnically ho-mogeneous since the beginning of thedecade as a result of the ethnic unmixingthat has been the primary, but not sole,cause of the migration .

Chaotic Unmixing

During the Soviet period a tight lid waskept on the nationalist and territorial aspi-rations of various ethnic groups. Sup-pressed ethnic grievances and territorial

claims have come into the open as theresult of the end of the cold war and the

liberalization that contributed to thebreakup of the Soviet Union, Yugoslavia,and Czechoslovakia. As new states seekto correct these grievances or assertclaims, other ethnic groups are excluded.

The response of many has been to migrateback to what they perceive to be their eth-nic homelands. This massive, unplanned,and chaotic ethnic unmixing has had anegative impact on development and hasled to increased poverty at a time whenthe states are also transforming theireconomies away from the centrally plannedmodels they used for decades.

With most of the armed hostilities in theformer Soviet Union having died down, muchof international community’s attention hasfocused on the repatriation of 780,000 refu-gees and 800,000 internally displacedpeople and on the rebuilding of Kosovo. Itshould be kept in mind that the conse-quences of armed ethnic conflicts linger longafter hostilities have ended and disap-peared from the headlines. A number of po-tentially explosive situations remain in theformer Soviet Union— and elsewhere in theregion— to which durable political solutions

Internally displaced person (IDP): A person in similar circum-stances to a refugee with the exception of not crossing an inter-national border. More difficult to deal with because such a personis often outside the reach of the international community.

International Organization for Migration (IOM): An interna-tional NGO that monitors the complex migration and refugeemovements and works on governmental capacity building inareas of migration and refugee legislation.

Irredentism: The policy advocated by members of an ethnicgroup of reattaching a region that was— or that they believeshould be— part of the ethnic homeland to the homeland. Usu-ally only possible when the group is a majority in the region andthe region is contiguous to the homeland.

Nonrefoulement: The principle that no person with a well-founded fear of persecution should be forcibly returned to thecountry where they fear persecution. This is the guideline underwhich the international community and other bodies dealing withrefugees operate.

Refugee: A person who is outside his or her country of originand is unable or unwilling to avail to the protection of that coun-try or return there. Such inability or unwillingness is attributableto a well-grounded fear of prosecution, based on race, religion,nationality, membership in a particular social group, or politicalopinion.

United States Committee on Refugees: A U.S. NGO thatattempts to find solutions to refugee problems partially throughpublicizing the plight of uprooted peoples. Compiles the an-nual World Refugee Survey.

United Nations High Commissioner for Refugees(UNHCR): The main United Nations body mandated to dealwith refugees. The UNHCR and the IOM organized the Com-monwealth of Independent States (CIS) Conference in 1996to deal with consequences of the large and complex post-Soviet migration. The World Bank has played a limited role inthe work on the conference that has fallen short of expecta-tions in terms of fund-raising and other areas.

Glossary


have yet to be found. A number of “pseudostates” exist— regions within sovereignstates that operate autonomously but are notrecognized as independent by any othercountry. These include the Transdniester re-gion of Moldova, Nagorno-Kharabak withinAzerbaijan, the Chechen republic within Rus-sia, the Ossestian and Abkhazian regionsin Georgia, and the Kosovo region within Yu-goslavia. In all of these areas the push forautonomy or territorial claims has resultedin ethnic violence and population displace-ment. The resolution of these conflicts maycause further displacement.

As a development institution, the World Bankhas an obvious, albeit uncertain, role to playin the ethnic unmixing and forced migrationtaking place across Europe and Asia.

More States, More Migration

Migration has always played a role in statebuilding or unbuilding. Thus, it should comeas no surprise that there has been somuch migration as the number of states in

the Europe and Central Asia region hasincreased from eight at the beginning ofthe decade to the current 27. Only fivestates in the region remain within the sameborders as at the beginning of transition.Most of the new, or newly independentstates are the homelands of a titular eth-nic group who have the goal of makingstate and nation consistent, often withgreatly exaggerated or conflicting claimsof homeland. This has led to a number ofepisodes of forced migration, as well asnoncoerced ethnic unmixing. Little of thebloody ethnic unmixing of the former So-viet Union has been directed at Russians;however, the largest number of Russianshave migrated back to Russia from areaswhere ethnic violence is the greatest.

In the new states of the former SovietUnion, much of the increase in ethnic ho-mogeneity has been due to the return mi-gration of more than 10 percent of theRussian diaspora population from thenon-Russian states. The rate of returnamong the states varies considerably,

ranging from 50 percent in the threeTranscaucasus states and Tajikistan tobarely 1 percent from Ukraine and Belarus.While the return migration of nearly 3 mil-lion Russians is considerable and hasplaced great strains on the depressedRussian economy to absorb them, mostRussians outside Russia were reluctant tomigrate. Russia realized the potential bur-den of absorbing 25 million Russians fromnon-Russian states, and discouraged mi-gration while helping the expatriots feelpart of the Russian nation by persuadingthe states to allow dual citizenship. Thus,with a few exceptions, most of the non-Russian successor states are embarkingon state building with significant minoritiesof Russians and other nationalities.

The mosaic of nationali t ies in theTranscaucasus region has been the areaof some of the most violent and severeethnic unmixing in the former SovietUnion. The conflict between Armenia andAzerbaijan over control of the Armenia-ma-jority enclave of Nagorno-Kharabak has

To deal with the current proliferation of ethnic conflicts, the Post-Conflict Unit was created in 1997 within the World Bank’s So-cial Development Network. The Bank plays a role in post-conflictreconstruction based on its comparative advantages in aid co-ordination, macroeconomic stabilization, infrastructure finance,social assessments of displaced populations, and social sec-tor restoration. The Bank, along with the European Commis-sion, is organizing the international community’s response tothe situation in Kosovo.

Keep in mind that the Bank is not relief agency, although there isoften a humanitarian impulse to avert every incident of violentconflict that causes population displacement. Many of the Bank’sprocurement and disbursement processes have proven to be astumbling block in post-conflict recovery. The Bank’s major rolecomes later in the post-conflict reconstruction phase and duringreturn to normal operations. To that end, the post-conflict fundwas created to be a quick-disbursing instrument through whichanalysis and piloting of reconstruction activities can be carriedout when normal Bank borrowing is not possible. Two grants each$1 million from the fund have been awarded to assist Albaniawith the refugees who have fled there from Kosovo.

World Bank Focuses on Conflicts, Refugees, Migration

More elusive are preventative measures that the Bank cantake in countries to manage conflict before it erupts into vio-lence. A better understanding of the historical dimension ofthe ethnic conflicts that give rise to violence and forced mi-gration is a positive first step. However, no single set of cir-cumstances leads to ethnic or intrastate conflict and populationdisplacement. There is an ongoing debate about the role aidplays in promoting civil society and good governance.

As a development institution, the Bank cannot resolve con-flicts, nor it is in the Bank’s mandate. The Bank’s role is not tointerfere in the internal affairs of a member country nor ques-tion its political orientation and obviously has less leveragewith non-members— keep in mind that Yugoslavia is a non-member. Promotion of growth, equity, and inclusion— all in-cluded in the Bank’s mandate— can also go a long way towardconflict management. In addition to infrastructure reconstruc-tion, which is at the core of the Bank’s role, more attentionneeds to be paid to sustainability issues. The Social Devel-opment Strategy Paper for the Europe and Central Asia re-gion that is being drafted lists migration and ethnic conflict asone of the main social development issues— and challenges.


caused an estimated 350,000 Armenians toleave Azerbaijan, of which 260,000 went toArmenia, and 167,000 Azeris to leave Ar-menia for Azerbaijan. An estimated 550,000internally displaced people remain inAzerbaijan. The separatist movements inGeorgia by the Abkhaz and Ossetian re-gions has caused an estimated 275,000displaced people. At its peak the civil war inTajikistan, which lasted from 1992 to 1997,caused the displacement of 900,000 people,700,000 of them internally. By mid-1997 apeace agreement had been reached and amajority of those displaced have returned.Even two of the relatively peaceful and pros-perous Baltic states— Latvia and Estonia—have been taken to task by the internationalcommunity over their exclusion of large Rus-sian-speaking populations through restric-tive citizenship and language laws.

The four-year war in Bosnia and currentdispute in Kosovo are rather well known.At the end of 1997 more than 800,000Bosnians remained internally displaced.More than 600,000 Bosnian refugees re-mained outside the country and 40,000refugees from Croatia were in Bosnia. Anintentionally decentralized state consisting

of the Muslim-Croat Federation of Bosniaand Herzegovina and the Serb RepublicSrpska continue the difficult rebuilding pro-cess there. The recent end to hostilities inKosovo has allowed a tentative start to therepatriation of Kosovars and to the recon-struction of infrastructure. Still, the Serbiangovernment views Kosovo as part of theSerbian homeland.

The transition states of the Europe andCentral Asia region contain about 7 per-cent of the world’s population but haveabout 15 percent of the world’s refugeesand internally displaced people. Other es-timates place the region’s share of refu-gees and displaced people at closer to 30percent. In most cases the conditions thatcaused these population displacementsare unresolved and the affected peopleremain in a state of permanent migration.

Displacement and Consequences

During the 1990s some titular membersof the newly independent states tried tocorrect what they perceived as historicalwrongs by giving preference to their eth-nic group, often by arbitrarily defining citi-

The August 1998 financial crisis in Russia had an immediateeffect on migration patterns in the country. The long-term im-pact of the crisis may have an even deeper impact on the ageand occupational composition of the country because of theselective nature of migration. Since the breakup of the SovietUnion at the end of 1991, Russia and the other two Slavicstates, Ukraine and Belarus, have been the only former So-viet Union (FSU) states where more people have arrived thanleft. Russia has received about 5.5 million legal migrants be-tween 1992 and 1998 while 2.5 million have left over the sameperiod, resulting in a net population gain from migration of 3.0million. The net migration was about 250,000 in 1992, Russia’sfirst year of independence, building to a peak in 1994 at morethan 800,000. Net migration has declined considerably sincethen to 300,000 in 1998. Since 1994 Russia has had positivenet migration with all other FSU states. Migration from Russiato outside the FSU (mainly Germany, Israel, and the UnitedStates) has been rather steady between 1990 and 1997 atabout 100,000 people a year.

Russia’s August Crisis Changes Migration Patterns

This same downward net migration trend and overall migrationturnover continued during the first eight months of 1998, withthe number of Russian citizens who left declining by 15 percentas compared to 1997. Following the August financial crisis,during the last four months of the year the number of peopleleaving increased by 18 percent and there is evidence that pres-sures for further emigration from the country persist. Emigra-tion to Israel from Russia doubled in the first two months of 1999.There is also evidence that many of the country’s young, whohave been recently educated in new professions, are seekingto leave for better prospects abroad.

The number of those migrating to Russia from the other FSUstates seems to have been also influenced by the financial cri-sis. Many Russians and Russian-speakers in other FSU stateshave postponed migrating because of the political and eco-nomic turmoil in Russia. The number of people migrating fromRussia to Kazakhstan actually increased in 1998, the first suchincrease in the 1990s.

zenship or introducing discriminatory laws.The majority of states, however, are tryingto walk the fine line between creating ahomeland for members of the titular nation-ality while also accommodating minoritynationalities. Kazakhstan, with its largeRussian population, is a good example ofthis balanced policy.

A number of factors dictate the level ofmigration and the degree to which it isforced. These have to do with the charac-teristics of the diaspora group, the home-land, and the host country.

• Size, history, rootedness, and geo-graphic concentration characterize thediaspora group. Russian populations innon-Russian states tend to be large andconcentrated, usually in the capital cities.Most were born in these non-Russianstates.

• A homeland’s attitude toward thediaspora community affects migration atboth formal and informal levels, which trans-lates into how much of a pull factor it be-comes. Some states such as Kazakhstanand the Baltics automatically grant citizen-


ship to members of the titular ethnic groupanywhere in the world. Others, such as Hun-gary, took a more neutral approach to itsdiaspora members. Hungary, while recog-nizing that Hungarians living in neighboringstates are part of the Hungarian nation, isnot ready to offer nonresident citizenship—this is done to preserve good relations withthose bordering countries that were estab-lished in the ruins of the Austro-Hungarianempire, inheriting millions of Hungarians.Germany and Israel are two homelands thathave greatly affected migration patterns inthe region by inducing a mass migration ofGerman and Jewish populations.

• As previously mentioned, the character-istics of the host nation toward ethnic mi-

Foreign Loans Diverted in Monster Money Laundering?The Mafia, Oligarchs, and Russia’s Torment

T he probe into the route of IMF loansto Russia is part of a wide-rangingU.S. federal investigation into Rus-

sian money transfers that passed throughthe Bank of New York (and its London of-fices) in the past year or so.

Capital Flight Schemes

Russia’s national police agency, the MVD,conservatively estimates that $9 billion il-legally flees the country each year. A studyby the Institute of Economics of the Rus-sian Academy of Sciences and the Cen-tre for the Study of International EconomicRelations at the University of WesternOntario, published this May, suggested thatup to $70 billion disappeared in 1992 and1993 alone. Other specialists argue thattotal capital flight in 1994–98 amounted tomore than $140 billion and currently is run-ning at more than $15 billion a year. Over-

norities and the degree of social inclusionhave been among the largest factors influ-encing either coerced or noncoerced eth-nic unmixing.

This recent and ongoing population dis-placement has negatively affected socialdevelopment in the region by increased un-certainty among those affected, fragmen-tation of social relationships, loss oflivelihood and savings, increased poverty,and necessary adjustments to new sur-roundings and new social institutions.Many migrants have been forced to makedifficult adjustments. Urban Russians fromthe non-Russian states, for example, havebeen directed to live in rural areas that theyare unaccustomed to. Many of the dis-

placed remain in limbo, wanting to returnto their homelands or integrate into theresident societies, but are bared from do-ing so. At the same time, a country unableto handle its large minorities, and whichforces them into uncertain status, willsooner or later be destabilized itself.

Tim Heleniak is in the World Bank’s De-velopment Data Group (DECDG). He re-searches and writes on internal andinternational migration in the Europe andCentral Asia region. This article is basedon the author’s own work and selectedpapers presented at the conference“Diasporas and Ethnic Migrants in 20th

Century Europe” held May 20-23, 1999,Humbolt University, Berlin, Germany.

all, some $350 billion in capital has fledthe country since the fall of the SovietUnion, with nearly a third of it landing inthe United States, intelligence sources toldthe U.S. News and World Report. Andinvestigators believe that the flow of fundshas accelerated since the crash of the rublein August 1998. As Russian companiesface bankruptcy, their motivation to pre-serve assets tends to vanish.

During an August 21 raid on the Bank ofNew York, U.S. federal investigatorsseized the files of Natasha GurfinkelKagalovsky, a senior vice president whosupervised the bank’s East Europeandivision. She and the bank’s vice presi-dent in London, Lucy Edwards, were sus-pended. Ms. Kagalovsky is the wife ofKonstantin Kagalovsky, Russia’s repre-sentative to the IMF in the early 1990sunder Prime Minister Yegor Gaidar’s

government. After Gaidar was replaced,Kagalovsky moved to Russia’s BankMenatep, headed by Russian oil and bank-ing baron Mikhail Khodorkovsky. Menatepsnapped up a number of enterprises dur-ing Russia’s controversial “loan to share”privatization, including a controlling stakein the country’s second-largest oil com-pany, Yukos. Menatep failed last yearamid Russia’s financial crisis (see box onpage 16). Kagalovsky is now deputy chair-man of Yukos.

Investigators say Menatep and Kagalovskyincreasingly are becoming a focus of theinvestigation. Federal and international lawenforcement officials say they are lookinginto whether Kagalovsky helped constructa byzantine network of offshore corpora-tions that politically connected or mob-linked Russians may have used to siphonhundreds of millions of dollars out of the

Federal and state authorities, examining possible money laundering through the Bank of New York, suspect that Russian organizedcrime may have been involved in skimming International Monetary Fund (IMF) loans and other foreign economic aid to Russia, theWall Street Journal reported on August 25. Altogether, as much as $10 billion was allegedly laundered through the bank, the 16thlargest asset-holding bank in the United States. A top IMF team started consultations in Moscow to pour over Russia’s finance books.


country. Investigators say that sum mayinclude part of foreign aid and fundspumped into Russia by the IMF to shoreup the reeling Russian economy.

Yukos denies that it has been involved intransfer pricing schemes, but oil industryanalysts calculate that its subsidiaries ef-fectively lost hundreds of millions in rev-enue last year by selling its oil to the holdingcompany at bargain rates. Yukos, like allpetroleum companies battered by lastyear’s low world oil prices, itself reporteda $79 million loss for 1998. A deal earlierthis year scattered the ownership ofYukos’s two oil production companiesamong six separate offshore firms, fromthe British Virgin Islands to the windsweptPacific atoll of Niue in the South Pacific.

Elaborate shell games have become adominant feature of Russia’s post-Sovieteconomy. Menatep’s own purchase ofYukos back in 1996 began with a flour-ish of thinly disguised deception byKagalovsky. He said “an unknown com-pany called Monblan” had won 85 per-cent of Russia’s second-biggest oilcompany. Menatep later admitted thatMonblan was a subsidiary.

Secrets of New York Bank Accounts

Also under the scrutiny of U.S. federal andlocal investigators is Russian business-

man Peter Berlin and his wife, LucyEdwards. Berlin, British corporaterecords show, is listed as a director ofBenex Worldwide Ltd., the company thatkept several of the suspicious accountsat the New York Bank. Benex maintainedclose ties to Semion Mogilevich the al-leged head of Solnetsevo, Russia’s larg-est organized crime group. Mogilevichhas built a $100 million empire fromarms dealing, extortion, prostitution, andother rackets. Before submerging in re-cent years, he lived in Budapest, Hun-gary, but is thought to have moved toMoscow in recent weeks. Mogilevich al-legedly is the principal target of a strikeforce assembled in early 1998 by theU.S. government. The force is com-prised of the FBI, the Treasury Depart-ment, the State Department, the CentralIntelligence Agency, and the HungarianInterior Ministry.

A senior U.S. government official said therewere “substantial links” between Benexand YBM Magnex International Inc., aNewtown, Pennsylvania, maker of indus-trial magnets. Mogilevich was a foundingshareholder of the company. Founded in1994 by a Russian emigre scientist, YBMMagnex, a magnet and bicycle manufac-turer, rose from an obscure penny stock toa multinational worth nearly $1 billion inless than four years. Its numbers aston-ished competitors and delighted stock-

holders. Net sales quadrupled from 1994to March 1998, net income jumped nine-fold, earnings rose by a factor of five, andthe future looked just as promising. Benexbecame a distributor of YBM Magnex’smagnets. By March 1998 YBM was boast-ing of plans to become “the world’s lead-ing producer of high-energy permanentmagnets.”

But six months later, in June of last year,YBM Magnex pleaded guilty to conspiracyto commit securities fraud and has sincefiled for bankruptcy-law protection. In De-cember 1998 the company’s new board,composed of outside investors, admittedto U.S. authorities that there was evidenceof YBM’s criminal wrongdoings, possiblyinvolving links to organized crime. YBM hadfaked customer lists showing money laun-dering activity in accounts and businessdealings in Eastern Europe and the Car-ibbean. (Money laundering means movingill-gotten gains through a series of bankaccounts to make them look like legitimatebusiness proceeds).

Earlier this year, the FBI and other fed-eral agents raided YBM’s world head-quarters in Newtown. The confiscateddocuments suggest that Russian mob-sters may have used the company’s East-ern European operations to laundermillions in dirty money through a web ofrelated enterprises.

Under the transfer pricing scheme, or “tolling,” Russian compa-nies have been selling products at below-market prices to theiroffshore intermediaries. The intermediary then sells the productsat the international price and the foreign currency proceeds neverenter Russia. This practice has drained billions in profits fromRussia’s core metals and oil companies into offshore accounts.

Some groups also carry out domestic “transfer pricing”— sell-ing their goods at below cost to a Russian intermediary com-pany that is controlled by a few executives, thus deprivingshareholders of the original company of their profits. Thesegoods can then be exported at a fair market price.

Transfer Pricing— Techniques to Syphon Money Abroad

While transfer pricing understates the true value of exportedgoods to minimize the amount of foreign currency that is le-gally required to be re-exchanged into rubles, an alternativeapproach is to overstate expenses.

These so-called bogus service agreements involve an off-shore company— often set up by an intermediary that takesa commission for its efforts— that offers fake consulting ser-vices to its Russian “client.” This practice allows money tobe exported, while the bills “paid” by the Russian companyreduce the domestic profits on which it is required to pay taxto the authorities.


The Budapest-based production facilityof Magnex was established eight yearsago as the property of the Mogilevich-controlled Arigo Ltd. Shortly thereafter itscapital increased and it started to producehigh-tech magnets. (As the Budapest-based World Economy Weekly re-ported, the shabby, run-down building thatemployed 200 people, one third of themRussian, did not reveal much about the hi-tech production, and hardly reflected the$80 million investments in the mid-1990s).“The products were sent back to the off-shore company at Caiman Island and thenreshipped to the CIS countries.”… At leastthat is what the owners claimed.

A year ago the Hungarian company, nowrenamed Crumax Inc., decided to start anew investment with $20 million in orderto increase production and build a newresearch and training basis. The Canadianinvestors vetoed the plan.

With the Money, Mogilevich Disap-peared Too

Mogilevich disappeared from Budapestfollowing a Hungarian-American coordi-nated raid. Officials confiscated docu-ments and computers in his Budapestoffices that well-informed sources link tothe FBI’s New York investigation. The Hun-garian authorities declined to discuss theresults of these raids. The Hungarian taxpolice have extended an ongoing inquiryinto companies controlled by Mogilevich.

Investigators in New York estimate $6 bil-lion zipped through the Benex accountsin the short time since authorities beganmonitoring the transactions last fall. Theytold the New York Times that the Berlinsmay be involved in one of the largestmoney-laundering operations ever con-ducted in the United States. Some $4.2billion passed through a single accountin more than 10,000 transactions be-tween October and March, the New YorkTimes reported. The cash in questionappears to have passed through Euro-

pean and U.S. banks before landing inan offshore account in the Channel Is-lands that was controlled by a Russiancommercial bank.

Some of the accounts Berlin establishedat the Bank of New York weren’t regulardeposit accounts but “micro/CA$H-REGISTER” accounts. These accountsare typically used by businesses for cashmanagement purposes and are de-signed to make international fund trans-fers simpler. Account holders accesstheir accounts and can conduct numer-ous transactions, including wire trans-fers and payment orders in foreigncurrencies, via a personal computer.

Were IMF Funds Hijacked?

The IMF said on August 23 that it waslooking into reports of diverted funds butthat it had made payments only to theCentral Bank of Russia. IMF spokesper-son Graham Newman pointed out thatunder the current standby credit IMF moneyis paid into the Russian government’s ac-count at the New York Federal ReserveBank and that these funds can only beused for repayments to the IMF. Earliercredits were paid into either the centralbank of Russia’s account at the NewYork Federal Reserve, or its account at(Germany’s) Bundesbank, and wereused by the authorities to build up re-serves, help finance the budget, or payinternational obligations.

The possible siphoning of funds fromIMF credits to Russia comes at a timewhen an audit released this summer byPricewaterhouse Coopers shows thatRussia’s central bank funneled $1.2 billionin IMF money in 1996 to a firm it controlledcalled Financial Management Co., orFimaco, in the Channel Island of New Jer-sey. The central bank hid that transactionfrom the IMF and later explained it wastrying to keep the money beyond the reachof creditors. The IMF has lent about $20billion to Russia since 1992. In July the

IMF approved a new loan of $4.5 billionfor Russia.

All this makes the ongoing IMF-Russiadiscussions even more complicated.Moscow’s IMF envoy, Mikhail Zadornov,told NTV television that negotiations,scheduled to last here until September1, will concentrate on the 2000 budgetparameters and Russia’s compliancewith a tight fiscal policy agreed on withthe IMF over the summer. The IMF wantsRussia to aim for a primary budget sur-plus of 4 percent of GDP next year— afigure that excludes Russia’s foreigndebt payments. Moscow ministers wantthe IMF to lower its sights, stressing thatchronically poor revenue collectionshould improve only enough next year tomeet a three-percent surplus.

Meanwhile, some members of Congressare launching their own probes into thematter. James Leach, a Republican fromIowa and chairman of the House Bank-ing Committee, is planning a hearing, ten-tatively set for mid-September, on the roleWestern banks may have played in help-ing Russian money laundering, includingan investigation of whether IMF fundshave been siphoned. “Russian banks ap-pear to be more platforms for insidersseeking to spirit money out of the countrythan intermediaries for domestic eco-nomic growth,” Leach said in a pressstatement. At issue is whether foreigntheft has been facilitated by self-servingbanking practices in the Western world,including the United States.

This article was based on reports of re-porters Michael Allen, Paul Beckett,Michael Binyon, James Bone, David S.Cloud, Alan S. Cullison, Andrew Higgins,and David Lister of the Wall Street Jour-nal, Lacy McCrary of the Philadelphia In-quirer , Gyorgyi Kocsis of the WorldEconomy Weekly, Budapest, and DavidE. Kaplan of the U.S. News and WorldReport.


T he drive for financial-industrial in-tegration has been rooted in So-viet history in a number of ways:

• Russia’s large industrial enterprisesoriginate from the Soviet era, and bureau-crats tend to preserve bureaucratic struc-tures.• Managers of industrial enterprises havebeen unable to adjust to market conditionsin their approaches to distribution andsales on domestic and external markets.• Russia’s financial capital and institutionshave operated in imperfect and fragmentedmarkets. To combine financial and indus-trial capital for investments and to restruc-ture enterprises became a necessity.

In 1990–92 Russian merchant capital-ism— a mix of commodity exchange, trad-ing, smuggling, and corruption— createdthe first large-scale conglomerates. Theirassets increased as financial marketsevolved, and the phoenix of financial capi-talism was reborn on the ruins of the so-cialist industry. Opinion was split onwhether the financial resources of theseconglomerates were channeled into long-term productive investments based on realneeds or aimed more at gaining conces-sions from the authorities.

By mid-1997 about 130,000 state-ownedenterprises— over half— had been priva-tized. Although formal privatization in Rus-sia proceeded quickly, it did not createresponsible proprietors willing to retooltechnologies, modernize production,manufacture competitive products, andmanage their enterprises more efficiently.Decisions to privatize were essentiallyguided by social and political goals.

Curse or Blessing?— Financial-Industrial Groups in Russiaby Tatiana Popova

Voucher privatization, the preferred ap-proach, produced a spectacular rate ofprivatization— at least on paper. Large in-dustrial enterprises were transformed intoopen joint-stock companies. Due to thelarge number of new owners, includingvoucher holders and labor collectives,ownership and control were scattered andunmanageable. This prevented the emer-gence of clearly identifiable owners. Whileworkers acquired most small firms in tradeand services, the state retained controllingblocks of shares in many formally “priva-tized” industrial firms. Efforts to privatizeby selling enterprises through offeringshave yielded meager results.

The Russian government thereafter de-cided to promote the financial-industrialintegration of enterprises and financial or-ganizations, hoping that it would help solvestructural problems while avoiding furthermonopolization of the economy.

Russia’s legislation currently covers twocorporate forms of financial-industrial in-tegration: official financial-industrialgroups and holding companies. A holdingcompany is defined as an enterprise, inany organizational and legal form, thatpossesses controlling blocks of shares ofother enterprises. A financial-industrialgroup is defined as a group of enterprisesand other organizations that pool their capi-tal, or a group of companies that consoli-date all or part of their assets, carrying outjoint investments aiming at technologicaland economic integration.

Regulators tried to prevent the formationof monopolies through envisaging the cre-

ation of at least three financial-industrialgroups with similar profiles in the sameregional market. The 1995 law limits theparticipation of any bank or enterprise toa single financial-industrial group.

A financial-industrial group can beformed around an industrial enterprise,research organization, bank, or tradefirm. However, to qualify as a financial-industrial group, participation of a manu-facturer of goods or provider of servicesand a credit organization is necessary.Financial-industrial groups that includelegal entities in other CIS countries areregistered as transnational group. If the fi-nancial-industrial group is based on an in-tergovernmental agreement, the group isgiven the status of an international group.

Participants in a financial-industrial grouppursued different interests: enterprises fre-quently sought the umbrella of a financial-industrial group to milk the government orbanks in order to stay alive or to acquirefunds for covering their operational costs,such as wages. Banks wanted to diversifytheir property, including having a direct rolein owning and managing industrial enter-prises.

The government had its own stake in thesuccess of financial-industrial groups: ithoped efficient groups could take over theroles of investors, managers, and liqui-dators of bankrupt enterprises. It offeredsupport to officially recognized financial-industrial groups. Groups of industrial andfinancial companies willing to register asfinancial-industrial groups in principle re-ceived state support and were classified

Starting in the early 1990s, Russian industrial companies and banks set up financial-industrial groups through equity ownership,sometimes through cross-ownership arrangements. Their goal was to combine financial and industrial capital and managerialknow-how, gaining advantage on the market and through the authorities. Both government-induced and market-driven financial-industrial groups became important factors shaping the development of the Russian economy. Their role in the Russian economyhas been mixed: it remains to be seen whether they can help overcome the investment and structural crisis or worsen the crisisthrough inefficient investment policies, monopolistic behavior, and abuse of power and influence.


as “official” financial-industrial groups—once the authorities registered them.

The state support can take several forms:• A financial-industrial group may receiveblocks of state shares. The state can off-set the debt of a member enterprise andgrant state guarantees for loans, basicallyfor investments. The state also can pro-vide investment credits and other financialsupport for the group projects.• An international financial-industrialgroup can receive favorable treatment oncustoms tariffs.• A financial-industrial group can be rec-ognized as a consolidated group of tax-payers with consolidated accounting.• A financial-industrial group can receivethe right to define the period of amortiza-tion of equipment and accumulate thefunds for its activity.• The central bank can provide banks thatparticipate and invest in financial-industrialgroups lower reserve requirements andchange other rules in order to increase in-vestments.• The government can financially supportfinancial-industrial groups that participatein federal programs.

In 1998 the 75 officially registered finan-cial-industrial groups produced about 10percent of the Russian GDP and em-ployed 5 million people— almost 30 per-cent of the industrial workforce. Officialfinancial-industrial groups— a group ofabout 1,150 non-financial enterprises and160 financial organizations— are concen-trated in a few regions. In 1997 almost 40percent of them were located in Moscowand most of the rest in Siberia and the Uralsregion.

The government initially expected a largervolume of integration in industry, but itcouldn’t afford to offer more generous in-centives. Many manufacturers were afraidof the dominance of the banks. Banks ontheir part found the rule of restricting theirparticipation to one financial-industrialgroup frustrating. This has slowed the for-

mation of officially registered financial-industrial groups and led to the fast spreadof ad hoc, “unofficial,” financial-industrialgroups. Hundreds of unofficial financial-industrial groups have been set up by in-dustrial, trading, investment, and insurancecompanies, which also established theirown “pocket banks” to provide financingfor the groups, work out investmentprojects, and take part in the management.

The huge financial-industrial alliances—comprising financial, investment, insur-ance, trading and leasing firms, pensionfunds, as well as large banks under thecontrol of oligarchs— have grown out of theunofficial groupings. Even after the shockof August 1998, these oligarchs— headsof several unofficial financial-industrial

groups— still control Russia’s oil, gas, andmetal industries, employ millions of people,bring in the bulk of the country’s hard cur-rency earnings, and excessively influenceRussia’s politics. Financial-industrialgroups gained special privileges, includ-ing tax concessions and exemptions fromcustoms duties.

The future of Russia’s large conglomeratesdepends on the willingness and power ofthe state to enforce effective antimonopolypolicies in regulating official and unofficialfinancial-industrial groups, especially clip-ping the wings of the oligarchs.

The author is Economist at the Interna-tional Fund for Social and EconomicReform, Moscow.

Secret to Happiness

“I don’t have a summer cottage which can be burglerized, a car to bestolen, and I don’t care about stock prices.”

From the Hungarian magazine Hócipõ


So, who are the twelve oligarchs and what are they doing now?

• Vagit Alekperov (president, Lukoil Oil). Lukoil remainsRussia’s leading oil company. Its 1998 output totaled 53.7million tons. Lukoil’s credit ratings improved since August1998.

• Petr Aven and Mikhail Fridman (co-chairmen, Alfa group).The Alfa group suffered less from the August devaluation anddefault than most of its rivals. In October, however, it admittedto being unable to repay a $77 million syndicated loan arrangedby Bank of America. Alfa holds on to Tjumen Oil, the group’smajor corporate investment, besides real estate, securitiestrading, and cement and chemical industries.

• Boris Berezovsky (founder, LogoVAZ). He has assets over-seas and close connections with President Boris Yeltsin’s fam-ily and staff. He maintains operating control of ORT, thecountry’s leading television network, Sibneft, a major oil com-pany, Logovaz, the Avtovaz auto dealership, Aeroflot airline,and the Nezavisimaia Gazeta.

• Vladimir Bogdanov (president, Surgutneftgas). His posi-tion did not change. Surgutneftgas, the second largest oil com-pany, produced 35.2 million tons of oil last year .

• Anatoly Chubais (president, United Energy System). Hisposition is unchanged.

• Vladimir Gusinsky (founder, Mostbank, Mediamost). His me-dia interests (including the second largest television network NTV,and the daily newspaper Today/Segodnia) put him in a strongposition as the parliamentary, presidential, and regional elec-tion campaigns get under way. There is talk of him taking a majorstake in the telecommunications holding Svyazinvest.

• Mikhail Khodorkovsky (founder, Rosprom/Menatep). Hismore viable assets have been transferred from Menatep Bankto the new Menatep, St. Petersburg. The group owns majoritystake at the Yukos oil company; controlling shares in plastics,metallurgy, textiles, chemicals, and food processing companies.

The Twelve Oligarchs— What Are They Doing?

• Vital Malkin (president, Russian Credit Bank). He has prom-ised foreign creditors to restructure the $650 million debt owedby his bank, but also has shifted assets to the newly estab-lished IMPEX bank.

• Vladimir Potanin (president, Interros Trading Co./Oneximbank). The former first deputy prime minister andputative architect of the 1995–96 loans-for-shares scheme,faces severe problems. License of Oneximbank has beenwithdrawn in July, but assets had been shifted to Rosbank,leaving behind debts— $525 million owed to foreign deposi-tors and investors and $1.5 billion to domestic. Interros as-sets shifted to Interros Prom. The oil company Sidanko facesbankruptcy proceedings together with a number of its sub-sidiaries, including Rosneft. Potanin has lost control overthe telecommunications holding Svyazinvest, having used itas collateral for a credit he was unable to repay. The groupstill owns 38 percent of Norilsk Nickel, 26 percent of jet-engine maker Perm Motors, 26 percent of car manufacturerZil, and has holdings in oil, metallurgy, and real estate busi-nesses.

• Aleksandr Smolensky (chairman, SBS-Agro Bank). SBSAgro was closed and temporarily placed under the adminis-trative control of the Russian Central Bank, later saved by agovernment stabilization fund. Smolensky’s new “front” banksinclude Soyuz Bank and First Mutual Society. Smolensky stillheads the SBS-Agro group, the parent holding company.

• Rem Vyakhirev (president, Gazprom). The August crisisstrengthened Gazprom and its chief, as the government has be-come more reliant on the company for revenue. Gazprom’s mainproblems remain unchanged: collecting domestic payments andnegotiating its tax bills with the government. In 1998 it regis-tered a $2 billion loss. The February appointment of formerGazprom boss and ex-prime minister Viktor Chernomyrdin asthe government’s representative in Gazprom was seen by manyas a prelude to Vyakhirev’s removal.

• Vladimir Vinogradov (president, Inkombank). Russia’s thirdlargest bank was temporarily closed, its license withdrawn.

Since most banks owned by the oligarchs had invested an average of 35 percent of their assets in the GKOs (short-termtreasury bills), the GKO moratorium— introduced after the collapse of the ruble in August 1998— effectively made theirbanks insolvent. As Marshall I. Goldman, professor of Wellesley College and Director of the Davis Center for RussianStudies at Harvard University, recently pointed out, “in a high-stakes shell game the oligarchs, though considerablypoorer, are defying the current economic malaise and remain ahead of the rest.” (The following list is based on his articlein the International Economy).


Readers’ ForumRussia’s Oligarchs Stole the State Machineryby Stefan Hedlund

I n 1989 Francis Fukuyama gainedworldwide fame with his book TheEnd of History and the Last Man.

The fundamental point of the book was thatthe ongoing collapse of the communist or-der also meant a final triumph for the West-ern way of life. Basic liberal valuesconcerning democracy, market economy,and the rule of law had emerged victori-ous.

Given the realities of the time, with thepeaceful “revolutions” in Central Europeand the growing signs of a pending implo-sion of the Soviet Union, Fukuyama’s pointwas compelling. It would also come to un-derlie much of the Western democracies’attitudes toward the growing number offormer socialist states in Eastern Europe.In an environment marked by the “Wash-ington consensus,” it had become difficultindeed to question whether a slavish imi-tation of the Western way really was theright way for everyone.

Is There Just One Right Way?

Ten years later we have accumulated suf-ficient experience to return to that ques-tion. In the part of Europe that then wascast in a “Soviet” mold and that on thesurface looked the same from Potsdamto Vladivostok, widely divergent degreesof progress have been recorded. Duringtransition to democracies, Central Europeraced ahead of the former Soviet repub-lics, and on the territory of the former So-viet Union the three Baltic states haveoutperformed their Russian neighbor.

In the field of policy advice there has beena strong drive to explain such divergencesin performance by pointing to varying de-grees of adherence to the prescriptions

issued under the Washington consensus.Now, however, the time is ripe to set suchexplanations aside and to question in-stead if there is any valid ground at all forthe notion of universally applicable policyadvice.

While the relative success stories in Cen-tral Europe have had little if anything to dowith Western advice and Western finan-cial support, in Russia the Western aideffort has been overwhelming. And Rus-sia, as we all know, is now de facto bank-rupt and a pariah on the financial markets.The artificial life support that is being of-fered by the IMF can do little more thanpostpone this realization. How then couldall this effort fail so miserably?

No one has come closer to an answer thanJeffrey Sachs when he proclaimed that inthe case of Russia he felt like a surgeonwho had sliced open a patient only to dis-cover that everything that was supposedto be there was not. So what exactly wasmissing? Some simple tools out of institu-tional theory may help us clarify that im-portant question.

The Institutional Change Triad

Putting it briefly, institutional change isdetermined by the interplay among formalrules, which may be changed overnight,informal norms, which change only gradu-ally if at all, and enforcement mechanisms,which provide legitimacy for the formalrules and may thus help transform the in-formal norms.

The main thrust of “shock therapy” was tochange the formal rules, and to do it asquickly as possible. Tacitly, if not openly, itwas assumed that any cultural differences

between nations that are embedded insocial norm systems could safely be as-sumed out of existence.

The long string of discouraging events thathave played out in Russia following thestart of “reforms” in January 1992 havebrought home the truth that cultural speci-ficity can be ignored only at a price. Thefactors underlying the plunder and destruc-tion of the Russian economy that havetaken place in the name of “radical reforms”may be sought in two different dimen-sions— both linked to the institutional triadlaid out above.

Beginning with the informal norm systems,it must be emphasized that a functioningmarket economy presupposes a set ofsupporting social norms that serve to blockthe formation of collectively irrational indi-vidual strategies of the prisoner’s dilemmakind. (See box next page.)

The “Wrong” Path Dependency inRussia

In the Russian case, however, social normsystems were very far from market conform-ing. This was due not simply to the antimarketpractices of the Soviet system but also tohistorical patterns of behavior that arestrongly marked by path dependency. A longlist of examples could be advanced but per-haps the most important is a deeply rootedrule aversion— drawing actors into elaborateschemes of rule evasion.

Path dependence in such behavior maybe established in two mutually supportiveways. On the one hand, we have organi-zational responses to a widespread prac-tice of rule evasion that are marked byincreasing returns and may, thus, not be


easily dislodged. On the other hand, wehave the formation of mental models thatserve to rationalize behavior that mightotherwise have been clearly seen as so-cially irrational. These mental models con-stitute a perhaps even greater obstacle tothe imposition of universal and transpar-ent rules of the game.

To recommend and undertake sweepingderegulation in an environment that wasmarked by a whole set of such nonmarketattitudes and modes of behavior was tanta-mount to courting disaster, for the simplereason that there would be no one left to carefor the collective rationality. Those who—somewhat belatedly— have been scoldingthe widespread Russian practice of rentseeking serve only to underline what reallyshould have been obvious from the start.

The other dimension in which we may findRussian specificity concerns the role of thestate. Again it bears emphasizing that a

functioning market economy cannot existin a vacuum. To mention one example,there can be no property without govern-ment, and without property rights there canbe no market economy. It also bears re-calling that it was not deregulation but theability and willingness of the state to guar-antee contracts and to act as a third partyenforcer that gave birth to the marketeconomy in the Northern Italian city statesin the 12th and 13th centuries.

In the Russian case we may find anotherpowerful path dependence in the view ofthe state as an alien and often hostileforce— in a society that never really hasevolved any sense of mutual relations be-tween the rulers and the ruled. For example,the strong notions of mutual rights and obli-gations that marked medieval WesternEurope, and which gave rise to the “West-ern way” of democracy, market economy,and the rule of law, have no correspondencein Russian tradition. The Soviet system in

this respect did little more than reinforce oldpatterns of viewing the law as a mere in-strument in the hands of the rulers.

Returning to what was said above aboutsweeping deregulation in a nonmarketenvironment, it must be added that theneoliberal crusade against the state hasgreatly compounded the damage. Giventhat the purpose of deregulation was toallow a wide scope for private revenuemaximization in an environment wherethere were few if any norms against steal-ing from public coffers, the forced abdica-tion of the state from its role as enforcer ofcommon rules was a sure way of complet-ing the disaster.

The grand program of privatization, oncehailed as “the fastest in human history,”provides but one illustration of this impor-tant point. By now there has been plentysaid about the predatory behavior of theRussian oligarchs, but none has put it bet-

Two people have been arrested separately, and are held inseparate cells. They are not allowed to communicate. Each istold the following:• We have arrested you and another person for committingthis crime together.• If you confess, and the other person confesses, we will re-ward your assistance to us and your sparing us the expense ofa trial by sentencing you both fairly lightly: to 2 years of prison.• If you don’t confess, and the other person also doesn’t con-fess, we will not be able to convict you, but we will be able to holdyou here and make you as uncomfortable as we can for 30 days.• If you confess and the other person does not, we will showour appreciation to you by letting you go free. We will then takeyour testimony, in which you will implicate the other person asyour accomplice, and put that person in prison for 40 years.• If you don’t confess, and the other person does, that person’stestimony will be used to put you in prison for 40 years; youraccomplice will go free in exchange for the testimony.• Each of you is being given the same deal. Think about it.

What should each player do?

A risk-averse person will always confess. Confessing is betterif the other person confesses (that way, you get 2 years instead

The Prisoner’s Dilemma: Cooperate or Defect?

of 40), and confessing is also better if the other person doesnot confess (that way, you get to go free instead of having toserve 30 days). Thus the equilibrium— the behavior we expectto see— is that each player confesses. The optimum, however,is clearly for each player not to confess, since each player thengets only 30 days.

With 40 years at stake, confession has nothing to do withwhether one is guilty. It has only to do with what is at risk. Theprisoner’s dilemma would be a completely depressing game ifnot for the possibility that cooperation can evolve in the longrun, even though in the short run it seems always better to strikeand run— to defect.

Robert Axelrod in The Evolution of Cooperation (1984) con-ducted a series of experiments in which the game was playedrepeatedly. Participants were invited to submit strategies forplaying this game over and over. He found that cooperationcould arise if the game were played over and over again and ifthe players involved have a large enough chance of meetingagain.

Based on material from Alannah Orrison, Social Sciences,Saddleback College, Mission Viejo, California.


UNDP Report Exposes Transition’s Dark Side—The Rise in Poverty, Crime, Disease and Mortality

During the transition process,gains in freedom have been ac-companied by losses of basic

economic and social rights. Millions ofpeople in the region are now unemployedor underemployed. Workers have beendriven into the low-paying and insecureemployment of the informal sector. Aver-age cash incomes have plummeted. Thecomprehensive system of social protec-tion has crumbled. Many basic social ser-vices now require fee payments or havebeen partially privatized. Public educationand health facilities have deteriorated orhave been replaced by private facilitiesavailable only for those rich enough to pay.Transition in the region has had other hu-man development costs.

Loss of Life: The Missing 10 Million

Loss of life has been the largest singlecost of transition, represented by the de-cline in life expectancy in several coun-

tries of the region— most notably in theRussian Federation and most strikinglyamong young and middle-aged men. Thetransition countries of Central Europehave fared much better than those ofEastern Europe. Most regrettably, thisreversal of the trend in life expectancymeans that several million people who didnot survive the 1990s would have doneso if life expectancy levels from before the1990s had been maintained. As a con-sequence, an estimated 9.7 million menare “missing” from the region.

Morbidity levels have also risen. Highmorbidity is characterized by higher in-cidences of common illnesses and bythe spread of such diseases as tuber-culosis— diseases that had been re-duced to marginal health threats in thepast. Particularly serious has been thespread of sexually transmitted diseasesand the rising threat of the HIV/AIDSepidemic.

Rising Poverty

The World Development Indicators1999, published by the World Bank, pro-vides the most recent illustration of therapid rise in poverty: “Even before the cri-sis, poverty was undermining transition inEastern Europe and the CIS. In 1989about 14 million people in the former Com-munist bloc lived on less than $4 a day. Bythe mid-1990s that number had risen toabout 147 million (from 4 percent of thepopulation in 1988 to 32 percent in 1994).”In Armenia a household survey conductedby the Ministry of Statistics in 1996 foundthat about 55 percent of households werepoor, based on a minimum consumptionbasket. In the Kyrgyz Republic, accordingto the National Statistics Committee, 71percent of the population had an incomebelow the poverty line in 1996— which wasbased on a scale of poverty in which 60percent of total income is spent on theminimum food needed for survival. In Geor-

Countries of the former Soviet Union and Eastern Europe are paying the price for their transitions to a market economy. Soclaims the United Nations Development Programme (UNDP) in a newly released report, Human Development Report forCentral and Eastern Europe and the CIS, 1999. The UNDP finds that “a human crisis of monumental proportions is emergingin the former Soviet Union.” The report had several major findings.

ter than George Soros who said that first“the assets of the state were stolen, andthen when the state itself became valuableas a source of legitimacy, it too was sto-len.” The real hallmark of the Russiankleptocracy is that the machinery of thestate itself has been hijacked by thekleptocrats and used for personal enrich-ment. And this, in turn, was facilitated bythe reformers’ crusade against the stateas an alleged obstacle to free markets.

The main conclusion to be reached fromwhat has been said above concerns notonly the massive damage that has beeninflicted on the Russian economy and on

Russian society by “reforms.” If we are toavoid deterministic statements about theRussian inability to change, we must ac-cept that 1991 did provide a “window ofopportunity” when many options wereopen. Against this background, the trag-edy of Russia’s failure becomes evengreater, for the simple reason that we mustnow realistically expect that there will be asubstantial backlash, both against theWest in general and against the very no-tions of democracy, market economy, andthe rule of law.

Paradoxically, it may thus turn out thatFukuyama was quite wrong. Liberal val-

ues may come under renewed threat—but not from an embittered Russia. WhileRussia’s efforts at imitating the West havebrought about a halving its GDP, China’sown way has led to a doubling of its GDP!These are not auspicious grounds onwhich to argue for the spread of Westernvalues.

Stefan Hedlund is professor of East Eu-ropean Studies at Uppsala University,Sweden. Address: Gamla Torget 3, Box514, 751 20 Uppsala, Sweden; Tel: 4618-471 0000; Fax: 4618-106-397; Email:[email protected]


gia in 1996 about two-thirds of the popu-lation had an income below the official pov-erty line. In Ukraine this total was about 50percent.

A recent study in Poland shows that 60percent of children suffer from some formof malnutrition. Income-poor families in thetransition countries have greatly reducedtheir consumption of milk, meat, and veg-etables and are now relying on cheaper,lower-quality foods. Iron deficiency is com-mon in the region. The number of Russianwomen suffering from anemia at the endof their pregnancies nearly tripled between1989 to 1994. An area study in Uzbekistanshowed that about 65 percent of womenages 15–50 were anemic in 1994. A 1996survey in Moldova revealed that 20–50percent of children had rickets because ofinadequate intake of vitamin D. Infant mor-tality rates have been held down in mostcountries, but the number of low birthweightbabies is on the rise, signaling future prob-lems in child mortality and malnutrition.

Some people have experienced muchgreater impoverishment than others. InRussia in 1997 the average old-age pen-sion was 34 percent of the average

wage— and this probably overstated thereal figure because delays in pensionpayments were even greater than wagearrears. Statistics show a sharp increaseof inequality in Armenia, the Czech Re-public, Hungary, Macedonia, Moldova,Russia, and Slovakia. In many coun-tries— including Armenia, Georgia, Rus-sia, and Ukraine— the share of averageincome spent on food rose dramatically.Despite the rising share of food, dailycalorie intake fell as average incomesand expenditures declined.

Shrinking Spending and Rising Costsin Education

Azerbaijan, Bulgaria, and Georgia areamong the countries where educationalspending has shrunk most. In Bulgaria edu-cation spending has been cut by more than50 percent in real terms. Value amounts ofscholarships and the number of studentsreceiving them have declined. In Moldova,for instance, stipends for students have fallento about a quarter of the average wage andare now provided only to students achievinggood academic grades. Students and theirfamilies have been expected to bear thegrowing burden of schooling costs. Enroll-

ment and attendance rates have fallen.Expenditures on nursery and other pre-school facilities have been slashed. In thecountries of the former Soviet Union,more than 30,000 pre-schools haveclosed between 1991 and 1995. This hasincreased the burden of household workon women and diminished their opportu-nities for employment.

In most countries the direct and indirectcosts of school attendance have risen forchildren and their families because facili-ties, transport assistance, stipends andsubsidies for books, and school mealshave all been cut. Increasingly, the qualityof schooling has declined due to over-crowding, dilapidated facilities, lack ofheating in winter, underpaid teachers andsupport staff, and lack of health checksamong children.

Rising Uemployment and InformalSector Activities

Mass unemployment has been a majorsource of social hardship in the 1990s fortransition countries, with Macedonia andMoldova having extremely high levels (morethan 30 percent), others with more than 20

Human development is defined as the process of enlargingpeople’s choices to lead a long and healthy life, acquire knowl-edge, and have access to resources needed for a decent stan-dard of living. The UNDP’s Human Development Index (HDI)measures the level of human development through three com-ponents: longevity, measured by life expectancy at birth; edu-cational attainment, measured by a combination of adult literacy(two-thirds weight) and the combined primary, secondary, andtertiary enrolment ratios (one-third weight); and standard ofliving, measured by real GDP per head (in dollars, on purchas-ing power parity).

The table on the next page ranks the countries in transition ac-cording to their HDI, as calculated in the Human DevelopmentReport 1998, released by the UNDP. Slovenia took the high-est marks, followed by the Czech Republic, Slovakia, Poland,and Hungary. Russia ranks 71st in the survey. Five countriesclosing the ranks of transition economies are Moldova,

Human Development Indexes: A Mixed Picture

Tajikistan, Vietnam, Mongolia, and Laos. But even they performwell when it comes to subtracting HDI ranking from real GDP percapita ranking— showing that their HDI position is been better thantheir GDP per head ranking. The higher a country’s HDI ranking,the more favorable is its human development situation relative toits wealth. The UNDP claims that a good HDI, in part, reflects thelegacy of pre-transition developments— for instance, longevity andeducation fared well in the communist systems. And while its“people lacked social and political freedom,” they also “enjoyedfull employment and an extensive system of social protection.”

The UNDP predicts “The worsening life expectancy for the early1990s and the deteriorating quality of education in many FSUcountries could cause further decline in their human develop-ment indexes, and could affect the potential for economicgrowth.” As indicated in Human Development Report 1998,the picture is more complex: out of 27 transition countries, 12did worse than in 1994, but 15 did better.


percent (such as Armenia), and mosthaving more than 10 percent of their la-bor force officially out of paid work.Added to the openly unemployed are themillions of discouraged workers in theregion who have dropped out of the la-bor force and the millions of others whoare classified as on “administrativeleave” or who continue to work but have

not been paid for many months— as inBelarus, the Kyrgyz Republic, Russia,and Ukraine.

With the increase in unemployment andunderemployment, informal economic ac-tivities— including the black market or otherillegal activities— have expanded. In Rus-sia informal activities accounted for about

half the GDP in 1997, while in Hungary theywere about 30 percent of the total nationalincome. A high proportion of the economi-cally active population is thus not coveredby entitlement to insurance-based socialprotection and is being subjected to in-secure working conditions with low payand negligible or nonexistent benefits.This has become an important problem

Combinedfirst-,second-

and third-Life Adult level gross

expectancy literacy enrollment Real GDP Lifeat birth rate ratio per capita expectancy Education GDP(years) (%) (%) (PPP$) index index index

# HDI Rank 1994 1997 1997 1997 1997 1997 1997 1997 1997 1994 1997 19941 Canada 79 99 99 22480 0.9 0.99 0.9 0.932 122 Norway 78.1 99 95 24450 0.89 0.98 0.92 0.927 53 United States 76.7 99 94 29010 0.86 0.97 0.95 0.927 0

33 Slovenia 35 74.4 99 76 11800 0.82 0.91 0.8 0.845 0.886 5 336 Czech R. -39 73.9 99 74 10510 0.81 0.91 0.78 0.833 -0.882 3 342 Slovakia -42 73 99 75 7910 0.8 0.91 0.73 0.813 0.873 9 1244 Poland -58 72.5 99 77 6520 0.79 0.92 0.7 0.802 -0.834 18 1447 Hungary -48 70.9 99 74 7200 0.76 0.91 0.71 0.795 -0.857 8 654 Estonia -71 68.7 99 81 5240 0.73 0.93 0.66 0.773 -0.776 15 -855 Croatia -77 72.6 97.7 67 4895 0.79 0.88 0.65 0.773 -0.76 18 -1058 Cuba n.a. 75.7 95.9 72 3100 0.84 0.88 0.57 0.765 4760 Belarus -62 68 99 80 4850 0.72 0.93 0.65 0.763 -0.806 15 -1362 Lithuania -76 69.9 99 75 4220 0.75 0.91 0.62 0.761 -0.762 22 -863 Bulgaria -69 71.1 98.2 70 4010 0.77 0.89 0.62 0.758 -0.78 23 -968 Romania -79 69.9 97.8 68 4310 0.75 0.88 0.63 0.752 -0.748 13 -371 Russian Fed. -67 66.6 99 77 4370 0.69 0.92 0.63 0.747 -0.792 8 -773 Macedonia, TFYR -80 73 94 70 3210 0.8 0.86 0.58 0.746 -0.748 28 -574 Latvia -92 68.4 99 71 3940 0.72 0.9 0.61 0.744 -0.711 15 -676 Kazakhstan -93 67.6 99 76 3560 0.71 0.91 0.9 0.74 0.709 15 -685 Georgia -105 72.7 99 71 1960 0.8 0.9 0.5 0.729 0.637 37 -3187 Armenia -103 70.5 98.8 72 2360 0.76 0.9 0.53 0.728 -0.651 26 -2491 Ukraine -95 68.8 99 77 2190 0.73 0.92 0.52 0.721 -0.689 27 -1492 Uzbekistan -100 67.5 99 76 2529 0.71 0.91 0.54 0.72 -0.662 19 -1496 Turkmenistan -85 65.4 98 90 2109 0.67 0.95 0.51 0.712 0.723 24 -1297 Kyrgyzstan -107 67.6 97 69 2250 0.71 0.88 0.52 0.702 -0.631 19 -1898 China -108 69.8 82.9 69 3130 0.75 0.78 0.57 0.701 -0.626 6 -3

100 Albania -102 72.8 85 68 2120 0.8 0.79 0.51 0.699 -0.655 19 -4103 Azerbaijan -106 69.9 96.3 71 1550 0.75 0.88 0.46 0.695 -0.636 34 -25104 Moldova -110 67.5 98.3 70 1500 0.71 0.89 0.45 0.683 -0.612 35 -28108 Tajikistan -115 67.2 98.9 69 1126 0.7 0.89 0.4 0.665 0.58 46 -35110 Vietnam -121 67.4 91.9 62 1630 0.71 0.82 0.47 0.664 -0.557 23 -26119 Mongolia n.a. 65.8 84 55 1310 0.68 0.74 0.43 0.618 26140 Lao People's Dem. R. n.a. 53.2 58.6 55 1300 0.47 0.57 0.43 0.491 6

Eastern Europe and the CIS 68.6 98.7 76 4243 0.73 0.91 0.63 0.754Industralized countries 77.7 98.7 92 23741 0.88 0.96 0.91 0.919World 66.7 78 63 6332 0.69 0.73 0.69 0.706

minusHDI rank

Real GDPper capita

(PPP$)rank(HDI)

valueindex

Humandevelopment

index

Source: UNDP Report 1998.

Ranking of transition countries according to their Human Development Index


Statistical Systems Need Overhaulin Transition Economiesby Misha Belkindas, Mustafa Dinc, and Olga Ivanova

Since the countries of Central andEastern Europe and the formerSoviet Union began the transition

to market-based economies, their statis-tical systems have struggled to operate inthe new environment. The quality of socio-economic indicators has deteriorated sig-nificantly over this time, due primarily to thefollowing reasons:• With loosened controls, enterprises havebeen less inclined to provide completedata to statistical authorities. In pursuit oftax evasion, there are strong incentives forunderreporting.• Many newly established private enter-prises, especially if family-owned, haveescaped the statistical network becausebusiness registers are both incompleteand outdated.• With the loosening of state control the

informal economy— already well developedin the pre-reform period— expanded. Infor-mal activities were not measured by sta-tistical reporting and the macroaggregates were not properly adjusted tocapture them.• Adjusting to international statistical stan-dards— notably, switching from the Mate-rial Product System to the UN System ofNational Accounts— was delayed.

In 1998 the Technical Assistance in Sta-tistics team of the World Bank Develop-ment Economics Data Group conducteda survey to assess the quality of statisticsin a number of transition countries. Thefindings suggest that in many countries thebasic data are well below satisfactory level(assumed to be equal to 3; see figure), witha strong correlation between average data

Data Quality in Transition Countries(The higher the per capita GNP the better the data quality.)

Source: compiled by authors.

for a growing number of women, who havebeen pushed out of the formal labor sector.

How Can New Development Strate-gies and Policies Help?

Because of the protracted and complex na-ture of transition, the responsibilities of thestate should increase rather than decrease.The state should be active and intervene incritical areas where market forces cannotensure an efficient allocation of resourcesor where access to basic assets and op-portunities for livelihood is inequitable.Market forces alone can never be relied onto create a fair or equitable society.

The key to economic recovery is to stimu-late higher levels of investment— includinginvestment in human capabilities. Revitaliz-ing economic growth should be a priorityover expanding systems of social welfare.This does not imply, however, that essentialexpenditures on human development shouldbe postponed. Such expenditures are astimulus to growth and affect the trajectory,speed, and destination of the transition.

Shifting from universal coverage of ben-efits and services to selectivity and tar-geting based on means testing hascreated substantial problems. Suchschemes rarely are effective in reachingthe intended beneficiaries and invariablyinvolve high administrative costs. In ad-dition, governments have been wronglyadvised to privatize many of their socialservices and social protection programs.The state must intervene because thesubstantial positive externalities fromsuch expenditures, or additional benefits,are enjoyed by society as a whole.

Based on Transition 1999— HumanDevelopment Report for Central andEastern Europe and the CIS, a UnitedNations publication. Website: http://www.un.org/publications. Email: [email protected]. Further information: UNDPPublications, New York, Ms. KowkabSimaan, tel. 212-906-6734.


quality and per capita dollar GDP in thesecountries.

The statistical systems for collecting, pro-cessing, and disseminating informationhave to be restructured to meet the de-mands for dependable data— from thegovernment, to underpin its policy deci-sions; from the business community, tomake proper investment decisions; andfrom the general public, to satisfy their re-quirements for information about firms.And this restructuring must be undertakenwith scarce resources and without disrup-tions. While the major requirements tostreamline statistical systems in the tran-sition economies are clear, it is also clearthat the process will take time.

Collecting, Processing, andDisseminating Data

Data Collection. In the transition econo-mies most statistical observations arebased on questionnaires filled out by re-spondents and returned to regional statis-tical offices. The amount of informationreported varies and may include from 10to 100 indicators. Because respondentsinclude both enterprises and authorities,

the content of the forms— along with thenumber of respondents— defines the“width” and the “depth” of the raw datamade available for further processing.

The number of respondents depends on thesurvey technique. Statistical data collectioncan be conducted either on a full-coveragebasis (census) or a part-coverage basis (asample survey).

The full-coverage census— a predominantmethod under central planning— does notwork in a market economy because it im-poses an impossible workload on statisti-cal offices due to the explosive growth inthe number of entities to be surveyed.

For a sample survey to be representative,those developing the survey need to knowthe total number of enterprises and theirrelevant features. As the private sectorgrows and enterprise activity extendsover regions and diversifies in nature, thereliability of statistical registers becomesincreasingly important. Comprehensiveand regularly recurring censuses of ma-jor economic areas are still needed toprovide detailed statistics at the national,regional, and local levels. These censuses

also provide a benchmark for the designand conduct of modern sample surveysbased on probability sampling methods.Sample surveys, while technically moredemanding in design and conduct, areless expensive and can produce moretimely statistics than censuses.

Data Processing. Still highly decentral-ized in most transition countries, data pro-cessing in the form of data capture,editing, and tabulation is done in local of-fices. Thus primary data never get to thecentral headquarters; only summary in-formation is passed upwards. This decen-tralized system was designed to helpadminister the command economy andtrack fulfillment of the plan. Its legacy is stillalive: statistical data processing is carriedout on microcomputers, using individualsoftware programs. Thus central statisti-cal offices are unable to use the morehandy and efficient standard data process-ing and data analyzing packages avail-able.

The data processing system needs to bechanged. Data processing is more effectiveif done centrally— allowing for economies ofscale in personnel and equipment. Sophis-

A $30 million World Bank loan to Russia supporting the “Devel-opment of the State Statistical System” project was approved inMay 1999 and covers all aspects of the statistical system. TheRussian government will contribute an additional $8.55 million tothe project. Goskomstat, the state statistical office, together withother data collecting agencies, faced many challenges thatemerged with the systemic changes in the Russian Federation. Inmacroeconomic statistics, the Goskomstat started to shift to newmacroeconomic indicators in compliance with the 1993 Systemof National Accounts (SNA), and began collecting and dissemi-nating data on prices. It introduced the Consumer Price Index(CPI) and other price indexes as well as new indicators reflectingthe social development. These efforts, helped by international or-ganizations and bilateral donors, have led to substantial improve-ments in macroeconomic and social statistics in Russia.

Despite these achievements, further efforts are needed toachieve timeliness, quality, relevance, and comprehensiveness

World Bank Loan Strengthens Russia’s Statistical System

of the statistics. Further, certain economic activities carried outby those in the shadow economy either are not captured orcovered partially by official statistical reports. This places ad-ditional challenges on statisticians to make adjustments to pri-mary information. The World Bank-supported project will helpto restructure the statistical system and strengthen the data col-lection agencies. It will introduce up-to-date information tech-nology based on modern equipment and software to the system.

Goskomstat will implement the main part of the project at thefederal and regional levels. Several subprojects will be imple-mented in other agencies— for example, the Ministries of Fi-nance and Economy, the State Customs Committee, andseveral regional administrations. Consultation, collaboration,information sharing, and support among stakeholders (theWorld Bank, Goskomstat, other data producing governmentagencies, and data users) are considered to be key factors forsuccess.


ticated data capture— high speed keying,coding, scanning, and electronic collectiontechniques— machine editing and imputa-tion, complex tabulation, data storage, andbackup are also easier to handle from asingle location. Centralized processing im-proves uniformity and access to data, but itrequires statisticians with better training andmore powerful computers.

Data Dissemination. Statistical officesand other government agencies in transi-tion economies have just started to pro-vide data to users in electronic formats.Most of these products are simply elec-tronic versions of printed reports. Elec-tronic products should contain moredetailed information than printed products,given the lower cost of providing data insuch electronic formats as CD-ROM. Evenentire data sets can be provided to users,allowing them to aggregate the data ac-cording to their needs.

The Internet is rapidly becoming the world-wide medium for information dissemina-tion. Statistical offices should use theInternet to deliver products to users. Butthis assumes the availability of the neces-sary electronic hardware. The Internet of-fers new possibilities to central statisticaloffices to recover some of the costs of theiroperations. They can make available cer-tain statistical information on a subscrip-tion or fee basis. Government agencies,however, should have access to all this in-formation free of charge.

Checklist of Unfinished Business

Transition economies have made consider-able improvements in their statistical sys-tems, but there remains much to accomplish:• Designing and conducting sample sur-veys that meet international standards,gradually replacing regular economic andbusiness censuses with sample surveys,using an optimum mix of censuses andsample surveys for economic and busi-ness statistics, and providing the neces-sary training for staff.

• Conducting a broad-based review ofwhat kinds of statistics are economicallyjustified at the state, regional, and districtlevels; deciding how frequently these areneeded and what accuracy criteria shouldbe applied to key statistics; and workingout a timetable to apply internationally ac-cepted, standard practices.• Establishing a solid statistical infrastruc-ture and well-designed legal frameworkthat includes business and household reg-isters, questionnaires, censuses, and sur-vey procedures.• Reorganizing and modernizing the design,strategy, and implementation of the data dis-semination system, thus improving economicmanagement and decisionmaking in thegovernment as well as in the private sector.• Creating standardized electronic datasharing facilities, with user-friendly soft-ware, supported by effective communica-tions, to serve government users in atimely manner.

How to Find Funds?

In many transition countries, restructuringthe statistical system requires substantialresources— technical and financial. The

World Bank’s support takes several forms,depending on the scale and scope of theproject. It can come in the form of a grant,part of a larger World Bank loan, a sepa-rate loan, or a partnership arrangementcofinanced with bilateral donors and otherinternational agencies.

Governments in transition countries shouldwork out detailed plans and cost estimatesfor developing their statistical systems.These plans would enable them to assesstheir financial needs, decide whether toapply for a World Bank loan, and allow pos-sible donors to coordinate support. To ac-complish this more effectively and efficiently,Development Economics— the researcharm of the World Bank headed by VicePresident and Chief Economist JosephStiglitz— has recently established a specialtrust fund that will extend the ability of tran-sition economies to get technical assis-tance and financing for development of theirstatistical systems.

Misha Belkindas is Team Leader,Mustafa Dinc, Consultant, and OlgaIvanovais, Economist at the TAS teamat DECDG, the World Bank.

From the Hungarian magazine Hócipõ

Parental Advice

“I can make you member of a board of directors, but you have to finishelementary school on your own.”


Why Do Firms Hide? Bribes and Unofficial Activity after Communismby Simon Johnson, Daniel Kaufmann, John McMillan, and Christopher Woodruff

A substantial amount of output in manydeveloping and post-communist transi-tion economies goes unreported. This“unofficial economy”— made up of under-ground and often illegal activities— im-pedes the country’s economic growth in anumber of ways. First, firms operating un-derground in this shadow economy cannotmake use of market-supporting institu-tions— such as the courts— and so may in-vest too little. Second, doing business insecret generates distortions because of theeffort needed to hide activities and avoiddetection and punishment. Resources thatare hidden may not find their highest-valueuses. Third, underreporting costs the gov-ernment tax revenue that might be put toworthwhile use.

Some Reasons for Hiding

What causes firms to operate in these un-official economies? Economic literatureoffers four explanations, each with distinctpolicy implications:• Entrepreneurs may go undergroundwhen statutory tax rates are high and otherofficial regulations are onerous. Cuttingtaxes and red tape are, according to thisview, the main ways to keep firms in theofficial economy.• The predatory behavior of governmentofficials— who seek bribes from anyonewith officially registered economic activ-ity— will drive some businesses into unof-ficial activities. In this view eliminatingbureaucratic corruption will prevent someof the flight into the shadow economy.• Firms might hide some of their output toescape extortion by criminal gangs. In this

view the remedy to unofficial activity isbetter policing and enforcement of thecriminal code.• The unofficial economy may result fromthe inadequacy of the institutional environ-ment. If it is hard to enforce contracts be-cause the courts do not work, a firm gainslittle from registering its business. In thisview the state needs to invest in a commer-cial court system to deter unofficial activity.

Most of the empirical research on the un-official economy uses macro data, suchas the amount of cash in circulation or elec-tricity consumption. These estimates con-sistently show that countries with inefficientregulatory environments and widespreadcorruption have an unofficial economyleading more than in excess of 40 percentof the official GNP.

Does Experience Match Theory?

Post-communist countries offer an oppor-tunity to examine the determinants of un-official activity because, starting fromsimilar levels of unofficial activity, theirregulatory environments have diverged.Recent studies estimate that in 1995 theunofficial economy in Poland was less than15 percent of GDP but in Russia andUkraine it was around 50 percent.

So why do firms hide? Using firm-leveldata from a survey of similar private manu-facturing firms in Poland, Romania, Rus-sia, the Slovak Republic, and Ukraine, wetried to find the reasons. The data showthat the five countries fall into two groups:Russia and Ukraine on the one hand, Po-

land, Romania, and Slovakia on the other.By all measures the countries of the formerSoviet Union are more hostile toward busi-ness than the East European countries. Astriking 90 percent of Russian and Ukrai-nian managers say it is normal for bribesto be paid to government officials. Around90 percent of the managers also said thatfirms in their industry pay for “protection”of their activities. The firms suffer extortionnot only from bureaucrats but also fromcriminal gangs.

Corruption is less pervasive, though notuncommon, in Eastern Europe. In the Slo-vak Republic 40 percent of managers saybribes are paid, and in Poland and Roma-nia that number is 20 percent. The mafia isless of a problem in Eastern Europe as well.Only 15 percent of Slovakian managers,and still fewer Polish (8 percent) and Ro-manian (1 percent) managers, said protec-tion payments are normally made. Thefirms’ tax payments are lower in these threecountries than in Russia and Ukraine. Onecost to a firm operating outside the formaleconomy might be less reliance on the pro-tection of the courts, making it hard to main-tain contracts with its trading partners. Whenasked whether they could use courts to en-force contracts with trading partners, justover a half in Russia and Ukraine said theycould, whereas two-thirds or more in Po-land, Romania, and the Slovak Republicsaid they could.

All the firms in our survey are registeredand operate in the formal economy, butmany of them hide at least some output.Underreported sales are highest in


Ukraine (averaging 41 percent of totalsales) and Russia (29 percent), and muchlower in Poland, Romania, and the SlovakRepublic (between 5 and 7 percent). Man-agers in Russia and Ukraine, then, faceworse bureaucratic corruption, more mafiaextortion, higher taxes, and a less effec-tive court system. They also hide more oftheir output. Comparing averages acrossthe countries, therefore, gives support toall four explanations for hiding.

Firm-level data from Poland, Romania,and the Slovak Republic find no signifi-cant association between tax rates andthe extent of unofficial activity in thosecountries. If there is a tax rate effect, itprobably lies more with the way the taxsystem is operated.

We find only weak evidence that the abil-ity of the legal system to enforce contractsaffects entrepreneurs’ decisions onwhether to hide their activities. Ability toaccess bank loans and to involve outsideowners also do not appear to be signifi-cant issues. This is probably because thefirms in our sample maintain at least someofficial activity and have access to govern-ment provided public services.

We find no evidence that payments to privatecriminal groups affect the decision to hideactivities. This may be because we surveyedmanufacturing firms that are relatively immunefrom mafia-run protection rackets. Most likely,however, it indicates that organized crime isnot as large a problem in Eastern Europe asit is in Russia and Ukraine.

There is a significant association betweencorruption— in the form of bribes paid togovernment officials— and the hiding ofoutput. This is far worse in Russia andUkraine than in Eastern Europe. But evenwithin Eastern Europe, firms that say bu-reaucrats are corrupt are more likely tohide their activities. However, we cannotdistinguish whether firms hide more toavoid corruption or whether firms that hidemore have to make illegal payments. Weleave this for further research.

This article is based on a paper by SimonJohnson, The Sloan School, MIT andWDI Research Fellow, Daniel Kaufmann,World Bank, John McMillan, Stanford andWDI Research Fellow and ChristopherWoodruff, UCSD.

O n June 18–19, 1999, 25 distin-guished experts on FDI attendeda conference in Ann Arbor,

Michigan, on the impact of FDI onemerging markets. Following introduc-tory comments, the five sessions fo-cussed on capi ta l markets, labormarkets, institutional and economicperformance, social transformation,and public policies.

The sessions were linked by the themethat the institutional environment mat-ters— where the institutional environmentis defined to include the level of entrepre-neurial and monitoring capability and thelegal and sociological structure. The im-pact of foreign entry on emerging econo-mies depends on the initial institutionalenvironment and how it evolves. In turn,foreign entry changes the institutional en-vironment, as does the behavior of theindigenous firms. Understanding theserelationships and their underlying dynam-ics will lead to fundamental insights for re-

Foreign Investment and Emerging Markets:Highlights of a Conference Organized by the William Davidson Instituteby Bernard Yeung

searchers, managers, and public policydecisionmakers.

Richard Caves of Harvard University setup the conference’s theme in his introduc-tory presentation. He surveyed crucialfindings on the spillover effect of FDI, ar-guing that the capability to develop com-plex business organizations might beimportant for economic development andfor the interaction between FDI and indig-enous firms. Spillovers thus depend onexactly what constrains the indigenousdevelopment of complex enterprises. Heproposed four constraints: the localenvironment’s traditional forms of inter-personal relationships and its shortage ofskills, knowledge, and managerial capa-bilities.

Following Richard Caves, Monty Grahamof the Institute of International Economicsnoted that most of the recent empirical lit-erature on FDI and economic growth failsto reveal a robust relationship, partly due

to weaknesses in data and measurement.FDI data are not very reliable. Also, FDI isnot merely bricks and mortars, it includesthe extent to which the investing firm in-volves itself in the local economy. To mea-sure FDI properly, one has to master howit manifests itself in terms of “ownership,control, and contribution to capital forma-tion.” Measurement is further complicatedby the fact that the influence of FDI on eco-nomic growth is both multifaceted andhighly variable.

Capital Markets

Randall Morck of the University of Albertapresented a summary of his work with vari-ous coauthors including Bernard Yeung,University of Michigan and Davidson Insti-tute, David Stangeland, University ofManitoba, Wayne Yu, Queen’s University,Ontario and Artyom Durnev, University ofMichigan. He presented evidence thateconomic growth is slower in countries inwhich the control of wealth is concentrated


in a few hands. Many emerging economieshave such “controlling hands”— entrenchedmanagers who often do not have a signifi-cant share of ownership. To preserve theirstatus, these managers discourage thedevelopment of a healthy capital market,resist reforms and liberalization, and typi-cally do not introduce innovations in theirown firms. Morck showed some evidencethat firms with these controlling hands haveaccess to less expensive capital but alsohave subpar performance. Moreover,economies where control of wealth is con-centrated tend to be less open and spendless on innovation.

After controlling for openness, regulations,and spending on innovation, economicgrowth remains negatively associated withconcentration in the control of wealth. Morck’sresults suggest that concentration in assetcontrol negatively affects the rest of aneconomy. He further showed evidence thatforeign entrants tend to break up the strangle-hold of controlling hands by reducing theircontrol of corporate assets.

Simeon Djankov of the World Bank andCaroline Freund of the Federal ReserveBoard followed with a discussion on foreignacquisition activities in Korea. They showedthat foreign acquisition targets are morelikely to be affiliated with business groups.

Labor Markets

Juan Alcacer of the University of Michiganpresented evidence that FDI is attractednot only by low wages but also by inexpen-sive human capital. In order to attract FDI,a country needs to attain a minimum levelof human capital development and thenoffer that capital at a competitive wage.Cross-country data fit better with his modelthan arguments focusing on wages. Implicitin this argument is that in order to attractFDI, an emerging economy’s workforceneeds to attain a fair level of “business so-phistication,” a point that echoes RichardCaves’ opening presentation. Alcacer thenraised the issue that there was little FDI in

many Eastern European economies, de-spite their high levels of human capital. Hisstatistics suggested that the explanationis that these economies lack infrastructureand entrepreneurial capabilities and thatthey carry a high political risk.

The work by Ann Bartel and Ann Harrisonof the Columbia Business School furtherdeveloped the conference’s emergingtheme. The authors disentangled thesources of public sector inefficiency using1981–95 panel data on manufacturingfirms in Indonesia, focusing on protectionfrom competition and access to soft loans.According to their results, the existing con-trolling hands of corporate assets clearlyare not running their firms competitivelyand yet try to preserve the status quo. Asa consequence, the local economy doesnot readily develop indigenous agile firmsthat can benefit from interaction with for-eign business.

Institutional and EconomicPerformance

Bruce Kogut of the University of Pennsyl-vania and Andy Spicer of the Universityof California–Riverside focused on theimportance of institutions. They showedthat in the absence of an institutionalmechanism of state regulation and trust,privatization policies in the Czech Repub-lic and Russia are not successful. Indeed,without strong institutions markets be-come arenas for political contests andeconomic manipulation.

Tarun Khanna of the Harvard BusinessSchool presented his work with KrishnaPalepu, also of Harvard Business School.Using Chilean data they demonstrated thatfirms enjoyed net benefit from their affilia-tion with Chilean business groups in the1988–96 period if group diversificationexceeded a threshold level. They also foundevidence of nondiversification-related groupbenefits. Their results suggest that firm-groups may be useful substitutes for poormarket institutions.

Social Transformation

Srilata Zaheer of the University of Minne-sota drew the audience’s attention to howinteractions with foreign business led tosocial changes. Interactions with foreignbusiness include direct investment, licens-ing, joint ventures, and more. Socialchange as a result of these interactionswas felt in labor rights and environmentalstandards, just to name a few. Public dis-cussions in developed economies oftentend to be ethnocentric, condescending,and dominated by special interest groups,many with hidden self-interests. Specialinterest groups often use multinationals asa means for pushing their social agendaon poorer economies. Most often lackingin the discussions is an understanding thatpeople in the poorer economies are ca-pable of making conscious and voluntarychoices on their own, though in somecases they may not be very well informed.Zaheer pointed out that although system-atic research has begun to appear, the lit-erature in this area is still thin.

Public Policy

Marina Whitman of the University ofMichigan Business School discussedthe change in U.S. policy discussions re-garding FDI. In the past, FDI was seenas a vehicle for the economic develop-ment of poor nations and as a partialsubstitute for foreign aid. Also, a clearpositive relationship was thought to ex-ist between economic development andpolitical stability— pointing the way to-ward democracy. In the 1990s the focusshifted to economics. Policy discussionsnow focus on the relationship betweenFDI and employment, wages, incomedistribution, trade and payments bal-ances, home capital investment, andspending on innovations.

More recently new and important issueshave been added to the discussion: Domultinationals lead to “racing for the bot-tom” as regards environmental rights and


labor rights? Do domestic policies likeexport controls (for security reasons) anddoes the Foreign Corrupt Practices Actaffect a multinational’s ability to competeglobally? Finally, Whitman drew theaudience’s attention to a question DannyRodrick first raised: has globalization gonetoo far? In a number of industrialized coun-tries there is tension between the greatereconomic uncertainty and the perceivedneed for social insurance created by in-creased openness. Tension also stemsfrom the growing limitations on the abilityto tax mobile factors of production— par-ticularly capital.

Jan Svejnar, Executive Director of the Wil-liam Davidson Institute, described the un-even distribution of FDI in EasternEuropean countries. All these countrieshave gotten over an initial fear of beingtaken over by foreigners, and the race hasbegun for FDI. The attempt to have a levelplaying field has been replaced by an at-tempt to maximize FDI flows.

FDI Motivations

Linda Lim, of the University of MichiganBusiness School, pointed out that Asianeconomies were more receptive to FDI.Cases in point would be Singapore andMalaysia, which have by far the highest percapita, or per dollar of GDP, FDI in theworld. She offered several important ex-planations. The first is the geography andpro-trade history of these countries. Thesecond is that these countries have diver-sified local cultures that are receptive tothe economic participation of foreigners.Finally, foreign entrants are competing withlocal capitalists who are mostly a verysmall and politically vulnerable ethnic mi-nority. These countries use familiar publicpolicies like tax holidays to attract FDI.Often attached to these attractions are pre-designated regional location and require-ments in local content, technology transfer,and employment. Many of these countriesare opponents of the WTO policy intendedto remove some of these practices.

David Li, of the University of Science andTechnology, Hong Kong, and the DavidsonInstitute, described the peculiar pattern ofFDI in China, most of which has taken placein the form of joint ventures between foreignentrants and indigenous firms since 1992.A large majority of the investment was roundtrip in nature; in other words, indigenousfirms invested in Hong Kong and then re-invested in China as foreign investment. Heargued that local governments, competingfor foreign investment, created internal taxesand regulations that favored FDI. As a con-sequence, a local enterprise forming a jointventure with a foreign enterprise could usethe joint venture to compete more success-fully with other local firms.

Simon Evenett of the World Bank high-lighted the concerns of the supranationalorganizations— the growing pressures for

local autonomy within many developingnations, leading to political instability andwhether there is too much globalization.The fear is whether too much globalizationleads to economic instability. Additionalconcerns about globalization include urbanpopulation growth, environmental issues,and the needed improvement in bankingand other capital markets.

Don Lessard of MIT concluded the con-ference by pointing out that we need toknow more about institutional environmentand how it affects a country’s economicinteraction with other economies.

Bernard Yeung is Area Director for ForeignDirect Investment at the William DavidsonInstitute and Professor of InternationalBusiness and Business Economics at theUniversity of Michigan Business School.

Guariglia, Alessandra, and Byung-YeonKim. Unemployment Risk, Precau-tionary Savings, and Moonlighting inRussia. WP 232, June 1999.

Mitchell, Janet. Theories of Soft Bud-get Constraints and the Analysis ofBanking Crises. WP 233, March 1999.

Bonin, John. Banking Reform in China:Gradually Strengthening Pillar orFragile Reed? WP 234, June 1999.

Lízal, Lubomír. Does a Soft Macroeco-nomic Environment Induce Restruc-turing on the Microeconomic Levelduring the Transition Period? Evi-dence from Investment Behavior ofCzech Enterprises. WP 235, June 1999.

Bratkowski, Andrzej, Irena Grosfeld,and Jacek Rostowski. Investmentand Finance in De Novo PrivateFirms: Empirical Results from theCzech Republic, Hungary, and Po-land. WP 236, April 1999.

Jackson, John, and Aleksander S.Marcinkowski. Analysis of Entrepre-

Recent working papers of the William Davidson Institute:http://lib.bus.umich.edu

neurial Attitudes in Poland. WP 237,March 1997.

Jackson, John, Jacek Klich, and KrystynaPoznanska. Firm Creation and Eco-nomic Transitions. WP 238, July 1998.

Jackson, John, Jacek Klich, and KrystynaPoznanska. Democratic Institutionsand Economic Reform: the PolishCase. WP 240, April 1998.

Carare, Octavian, Constantijn Claessens,and Enrico C. Perotti. Can GovernmentsMaintain Hard Budget Constraints?Bank Lending and Financial Isolationin Romania. WP 241, January 1999.

Perotti, Enrico, and Stanislav Gelfer.Investment Financing in RussianFinancial-Industrial Groups . WP242, October 1998.

Perott, Enrico, and Pieter van Oijen.Privatization, Political Risk, and StockMarket Development in EmergingEconomies. WP 243, March 1999.


The countries that are changing from com-munist to post-communist societies areundergoing a process that has been andcontinues to be difficult, tumultuous, andoften painful for their citizens. In a few shortyears, people in these countries have livedthrough more social, political, and eco-nomic change than those in more devel-oped, Western economies will see in alifetime. Both for those living through thisprocess and for those who study and ana-lyze it, there is a recurring question: Whenis this transition over?

During the 1997/98 academic year, sixdistinguished economics scholars— MarieLavigne, Alan Gelb, Anders Åslund, Nicho-las Lardy, Jan Svejnar, and János Kornai—visited Western Michigan University andoffered their answers to this question.Theiranswers are in some ways very differentand in others very similar, but always in-teresting and insightful. In this introduction,I will present the speakers, their lectures,and their answers.

The Speakers

Marie Lavigne began her lecture by out-lining the many legacies of communismand explaining how they negatively affectthe transition process. She argued that onesignificant legacy is what she calls, credit-ing János Kornai, “paternalism.” Thislegacy means that changes in basic atti-tudes are needed before people behaveas proper economic “agents.” She thendescribed the basic elements of the tran-sition package, discussed generally howthese elements have been implemented,and compared the outcomes. In short, shefound that in the transition countries lib-eralization has been fast (in most cases),stabilization fragile, and structural trans-formation slow. Unlike the other authors,

How Will We Know Transition is Over?by Annette N. Brown

she also assessed the outcomes usingthe Human Development Index, which sofar shows improvements in only a fewcountries. Lavigne listed several barriersto achieving standard market economiesand then discussed more specifically theobstacles that the candidate countriesface in achieving EU membership. Interms of barriers, she again stressed theproblem of attitudes and emphasized theneed to build strong civil societies. ForEU membership, the obstacles arise frompoorly defined membership conditionsthat are in some cases stricter than thosefor current members.

Alan Gelb started by elaborating a pointthat general economic analysis often for-gets or ignores, but is brought to the fore-front by transition: “Like automobiles,market economies come in many differentmodels.” To be successful, Gelb argued,reform policies need to be broad-based(because they are highly interdependent)and sustained (because the cumulativeexposure to reforms is more importantthan the immediate reaction in determin-ing outcomes). Different forces drive re-forms, which naturally lead to differencesin the pace and phasing in of changeacross countries. There are also many, ifnot too many, explanations for transitionoutcomes. Gelb asked the question,“Could an alternative policy have workedin Central and Eastern Europe and theformer Soviet Union?” In his conclusion, heraised an even more important question:“What kinds of economies and societieswill the transition countries turn out to be?”He identified, in particular, the increasinglyunequal distribution of property and in-come as a major challenge for the future.

Where Gelb offered explanations for thedifferences in outcomes among countries,

Anders Åslund focused on one issue: rent-seeking. Åslund drew a clear line betweenrent-seeking (which he defines as the ex-traction of monetary benefits from the gov-ernment) and inflation and between inflationand GDP performance. He then identifiedthe various types of rent-seeking and iden-tified who has benefited the most from each.In explaining why rent-seeking was so muchmore a problem in the former Soviet Unionthan in East-Central Europe, Åslund ex-plored the political-philosophical legaciesof the communist system, including thestrength of the old communist elite(nomenklatura); the weaknesses of thepost-communist state, democracy, and civilsociety; the quality and independence of themedia; and the people’s understanding ofand attitudes toward the market. Economiclegacies also influence rent-seeking, suchas kleptocracy, perverse relative prices,deep financial crises, and natural resourceendowments. Åslund then argued that rent-seeking has been significantly reduced inmost of the countries of the former SovietUnion and emphasized that privatizationserved to diminish rather than to increaserent-seeking.

Nicholas Lardy’s lecture was distinct inthat it focused on one country— China—that has followed the very different reformpath of gradualism. Lardy comparedChina’s reforms, starting in the 1970s, tothose of Eastern Europe and the formerSoviet Union and argued that in spite ofChina’s superior economic performance,its reforms are unsustainable. Three is-sues raise particular concern: enterpriseperformance and debt, nonperformingbank loans, and declining tax revenues. Inthe second part of his lecture, Lardy ex-amined the necessary reform of China’sbanking sector in more detail. It would beextremely difficult for China to default on

This introductory chapter of the author’s study “When Is Transition Over?” brings together the thoughts of leading scholars on theprocess of transition, with a focus on the institutional, economic, and political standards that indicate the end of the transition period.


household liabilities, as Russia did, be-cause the volume of household savings istremendous. It would also be infeasible forChina to gradually recapitalize banksthrough reinvestment of profits, as Hungarydid, because the necessary recapitaliza-tion is too great. Instead, Lardy recom-mended that China recapitalize by injectinggovernment bonds into these banks.

Jan Svejnar, in the first half of his lecture,described the “Central European model”of transition and compared and contrastedit with two other models, the “Asian model”and the “Russian and NIS model.” Svejnaridentified several key areas where the tran-sition outcomes have been systematicacross the Central European countries,chief among them being that all of thesecountries now have functioning marketeconomies. More interesting, perhaps, arethe distinctive results that he identifiedamong these countries, which so often areconsidered a group. Privatization has pro-ceeded unevenly, labor force adjustmenthas differed significantly, and various ex-change rate policies have resulted in di-verse foreign trade performances. Thesecond half of his lecture focused on thechallenges ahead for Central Europe. Al-though other speakers visited this theme,Svejnar provided the most detail, givingwhat Lavigne might call a “full prescriptionfor finishing transition in Central Europe.”The foremost challenge, Svejnar argued,is to generate and sustain high rates ofgrowth. The building blocks for this growthinclude such strategies as high rates of ef-ficiently placed investment, human capitaldevelopment, and establishing effectivecorporate governance.

János Kornai set out to discuss transfor-mation rather than transition, where trans-formation can be called the processesfollowing transition that improve the func-tioning of a capitalist system. An impor-tant part of transformation— not just informerly communist countries but also insome Western countries— is the reform ofthe welfare state. Kornai stated explicitly

the ethical principles underlying his analy-sis: respect for individual sovereignty,moral obligation to solidarity, and commit-ment to democracy and the transparencyof public decisionmaking processes. Theinitial conditions in any transformingeconomy determine which of these prin-ciples might be problematic. Kornai ar-gued that there is a clear need for healthcare reform in Hungary. Hungarians arecurrently demanding improvements in thequality of their health care system withoutunderstanding who pays for this service.He offered several concrete suggestionsas to how the provision of health care canbe changed in line with his underlying ethi-cal principles.

These lectures shared several threads. Allspeakers accounted for the initial condi-tions, or legacies, in their analysis. In par-ticular, they all mention the need to changepeople’s attitudes toward and understand-ing of capitalism and market economies.Related to these changes at the individuallevel, most also mentioned the necessityto develop strong civil societies, in whichinstitutions support both capitalism anddemocracy. The speakers generally con-sidered transition to occur in two stages:the first primarily involves liberalization andstabilization, the second encompasses amyriad of structural reforms. They roughlyagreed that the first stage is complete inmany of the countries, but that progressand success in the second stage havebeen quite mixed. Finally, most empha-sized the concept of transparency as animportant goal in a variety of contexts. Thelectures also differed in many ways, andperhaps the most interesting divergencelies in the answers that are presented.

The Answers: When Is TransitionOver?

Lavigne responded directly: “I think thequestion is unanswerable.” Indirectly, how-ever, she offered another reply: transitionis over for the CEE countries when theybecome members of the EU. This answer

is important to consider because it is ob-vious to many people in Europe, butLavigne deems it unworkable because theEU conditions are vague and unequallyapplied. Although she did not offer her owncriteria for the end of transition, Lavigneconcluded that transition is not over yet.

Gelb answered the question straightaway:“Transition is over when the problems andthe policy issues confronted by today’s‘transition countries’ resemble those facedby other countries at similar levels of de-velopment.” He further stated that no mat-ter how this definition is operationalized,the “transition countries are not there yet.”

Åslund measured the end of transition ac-cording to the reduction of rent-seeking,which reflects a variety of institutional re-forms. According to his standard, Åslundconcluded that transition is over in all buta few countries.

Lardy argued that transition in China wouldnot be complete until three sectors wereaggressively reformed: state-owned en-terprises, the financial sector, and govern-ment service provision.

Svejnar presented two conditions for tran-sition to be over: when central planning isabolished, and when an efficiently function-ing market system has taken its place.According to these conditions, he con-cluded that transition is not over in any ofthe considered economies.

Kornai answered this question with themost precision. Transition is over whenthree— and only three— criteria are met:when the communist party no longer hasmonopoly power, when the dominant partof the means of production is privatelyowned, and when the market is the domi-nant coordinator of economic activities.Using these criteria, he concluded thattransition is over in Hungary and probablyin several other countries as well. We cangroup these answers into three categories:systemic, outcomes, and institutional.


Systemic. Kornai’s answer is systemic inthat he looks at changes in the features ofthe economic systems to judge when transi-tion is over. He makes clear that the newsystem, the endpoint of transition, is a mar-ket economy as defined by his specific cri-teria. Gelb’s answer also contain a strongsystemic component but is more obscurethan Kornai’s. Gelb defended this obscurityby arguing that models of market economiesvary greatly. Each transition economy willhave its own terminus of transition, whichmay or may not resemble a Western mar-ket economy. Therefore, the indicator seemsto be when the economy resembles a mar-ket system rather than a communist one. Inspite of a similarity in their criteria, Kornaiand Gelb reached very different conclusions.Kornai believed that transition is over, at leastin some countries, while Gelb said none ofthe countries has reached this stage.

Outcomes. In the second category, theanswers are based on outcomes. Lavigneconsidered, and then discarded, the cri-terion that countries have gained EU mem-bership. While such a result is certainlydependent on systemic changes, the sug-gested criterion itself examines just theoutcomes. Svejnar also proposed a re-sults based answer: the end of transitionis the state of an advanced marketeconomy. Again, a systemic component isinvolved, especially in the first condition ofeliminating central planning, but the ulti-mate condition is based on outcomes.Svejnar defined efficient functioning to in-clude achieving rapid and sustainablerates of growth and becoming compatiblewith advanced market economies. In short,these answers suggest that transition willbe over not just when economies operatedifferently, but also when they operate suc-cessfully. As a result, although Svejnar andKornai clearly agree that the countries ofCentral Europe are market economies,Svejnar said they have at least 10 yearsto go, while Kornai said transition is over.

Institutional. Åslund’s and Lardy’s an-swers, which I have categorized as “institu-

tional,” fall somewhere in the middle. Al-though the rent-seeking that Åslund exam-ined arises from the systemic changes,clearly the new market system is consid-ered to be part of his endpoint. For ex-ample, the liberalizations of domestic pricesand trade represent two measures towardeliminating rent-seeking that are also partof the systemic change. However, Åslund’sendpoint encompasses more. Policies toabolish rent-seeking include the liberaliza-tion of foreign trade, the unification of theexchange rate, and the elimination of inter-est subsidies. He also indicated that astrong central bank is important. With theselatter conditions, Åslund included elementsof institutional, or structural, change in hiscriteria for the end of transition.

Like Åslund, Lardy identified specific insti-tutional reforms, beyond the systemicchanges, that are required for the comple-tion of transition in China. State-owned en-terprises need to be restructured so that theyare forced to be profitable and desist fromaccumulating large bank debts. The finan-cial sector, the emphasis of the lecture,needs to be recapitalized and reformed sothat banks operate as effective financial in-termediaries. The government needs tochange its operation as well. It needs to col-lect more tax revenues and increase its roleas a provider of social services so that theenterprises can focus on their primary pro-duction. These criteria are clearly institutional,especially since Lardy avoided calling for theprivatization of state-owned enterprises,which would be a more systemic change.

Gelb also highlighted institutional determi-nants. For example, he suggested that,even with private ownership (a systemicfeature), the Czech voucher funds (an insti-tutional element) will make the Czecheconomy distinctive, and thus in transitionfor some time to come. He concluded that,in practice, the core systemic changes andthe combination of institutional changes gohand-in-hand in moving an economy towardits transition endpoint. Compared withÅslund’s and Lardy’s approaches, how-

ever, Gelb’s is again more obscure. Wherefor Åslund rent-seeking identifies a fairlyspecific set of necessary institutions, Gelballows that the combinations will vary ac-cording to different levels of development.

In sum, the answers the speakers providedwere very different, and the old maxim thateconomists never agree seems to hold true.The question is academic, however, andmore important than the proclamation aboutwhether or not transition is over is the analy-sis of the problems these countries still faceand the recommendations for what can andshould be done to address them. Alongthese lines, the speakers tended to agree.

Postscript

Clearly the productive structure of any mar-ket economy is constantly evolving, andthese changes on the margin are vital for thecontinued success of the system. I do notmean to say that transition is over when theorganization of production stops changing,but rather it is over when the productive struc-ture has been transformed from its inheritedorganization to one that continues to changeonly slowly with the evolution of the economy.For example, when the processes of entry,exit, expansion, and contraction act to com-pletely reshape industries, the economy isstill in transition. When these processessettle such that they only change overall in-dustry structure during a long period of time,then transition is over. Like Gelb’s endpoints,mine are obscure— because we do notknow what the long-run equilibrium will re-semble. We do not even know whether forany given country there is one, or more thanone, possible equilibrium. Thus, this answer,like many answers to academic questions,leads to more questions.

Excerpted from “When Is Transition Over?”Annette N. Brown, editor, pp. 1-11.Kalamazoo, Michigan: W.E. Upjohn In-stitute for Employment Research. Usedwith permission. Annette Brown is a pro-fessor at Western Michigan Universityand a WDI Research Fellow.


How to Make Transition Work for Women—Gender Equality: A Wake Up Callby Sarah Nedolast

W hile there is always a price topay and sacrifices to be madeduring economic develop-

ment, the groups that pay most dearly areoften overlooked. In Central and EasternEurope, women bear the brunt of change—as shown by labor market, political, andpoverty indicators. Women’s position inthese societies has declined rapidly dur-ing transition— a transition that largely isbeing managed by men.

Under the communist system gender equal-ity was a nonissue— the state proclaimedthat equality had already been achieved. Of-ficially, women and men were guaranteedequal pay for equal work, equal access toeducation, equal property and parentalrights, and equal representation in the politi-cal realm. In addition, women were grantedliberal maternity leave and inequality be-tween spouses was abolished by the state.But much of the equality proclaimed by thesocialist system was equality under an op-pressive regime.

After 10 years of transition, women in thisregion are facing many difficulties. Statis-tically, economic reforms have most ad-versely affected women as a social group.Women’s participation in the labor forcehas declined sharply, they have lost theirvoice in government, and they make up anincreasingly large percentage of the poor.• Labor force participation. Women’sparticipation in the labor force has de-creased in Central and Eastern Europe,making women a disproportionately largepercentage of the unemployed. Althoughwomen make up just a little more than 50percent of the population in the region, a

forthcoming report by UNICEF reveals thatof the 10 million unemployed, 6 million arewomen— this despite having achieved ahigher average level of education.• Political representation. Most citizens

of post-communist societies are stillunwil l ing to acknowledge women’srights as an issue, and women often arenot aware of their rights— nor how to de-fend them. As a result of free electionsin transition economies, women on av-erage hold few parliamentary seats. Al-though under the communist electoralsystem women were assigned one-third of these seats, these fixed elec-tions were misleading because realdecisions were made in the CentralCommittees and Politburos of the Com-munist Parties— where women werehighly underrepresented.• Poverty. As the number of single par-ent families rise, state benefits decrease,and employment opportunities fall, womenare becoming the most populous group ofpeople living in poverty in Central andEastern Europe.

These outcomes may be explained by a va-riety of events. Many large, state-owned en-terprises— which once employed manywomen— have closed during transition. Be-cause women are considered higher riskand more expensive labor, finding employ-ment for men is the priority. Women might,for instance, take maternity leave and stayat home during the first years after a childis born, a period during which it is againstthe law to fire them in several countries.Women are also often under pressure toreturn to traditional roles: staying home andtaking care of the family. Under these cir-cumstances a woman’s chances of beingconsidered a serious contender for a job—or for that matter political office— are ratherslim. Further, men are more likely to benefitfrom retraining or education opportunities.

These trends and the prospects for elimi-nating gender discrimination were the top-ics of the recent seminar “Making theTransition Work for Women in Europe andCentral Asia,” hosted by the World Bankin Washington, D.C. The seminar broughttogether gender experts, scholars fromCentral and Eastern European, NGO lead-ers, and practitioners to offer suggestionsto ensure that transition would work forwomen in the region. Their suggestionsincluded the following:• Women entrepreneurs should receivemore support and easier access to credit.• Women should be encouraged to par-ticipate more actively in politics, especiallyby increasing their presence in nationallegislation.• Women should be encouraged to takepart in retraining and take advantage ofeducational opportunities.

Transition from a socialist to a market economy in Central and Eastern Europe has sparked wide debate about shock therapy,gradualism, and sequencing. But what effects have these changes brought on by transition had on those who live in thesechanging societies? In particular, what effects have these changes had on women?


• Women-oriented civil organizationsshould be granted adequate support.

Democratization and economic progress pro-vide women with the tools to overcome the“invisible barriers” impeding their advance-ment. Opportunities exist to capitalize on theirentrepreneurial skills and assume positions

of management. Women can pursue mean-ingful participation in the political system. Atthe least they can participate and voice theirconcerns in civic organizations, which are be-coming an important force in society.

Transition strategies should take into ac-count the policy effects on women, and

women must participate in the formula-tion and implementation of reforms. Thebest way to ensure an equal and opensociety is to provide for equal participa-tion in the society’s development.

Sarah Nedolast is Junior Associate forPREM Vice Presidency, the World Bank.

World Bank/IMF AgendaWorld Bank Lends Record $29 Billionin Fiscal 1999

The World Bank’s loan commitment totaled$29 billion in the fiscal year that ended June30, with Argentina, Indonesia, China, and theRepublic of Korea receiving the largest por-tions. The total surpassed the previousrecord of $28.6 billion set in 1998. The WorldBank said that at the same time that its lend-ing amounts increased, the quality of itsloans also improved with fewer projects atrisk of not reaching their goals. “While wesee for a second fiscal year that the finan-cial crisis has resulted in record lending, Iam cheered to see an increase in the qual-ity of loans we have provided,” World BankPresident James Wolfensohn explained.During the 1999 fiscal year the InternationalBank for Reconstruction and Development(IBRD) and the International DevelopmentAssociation (IDA) combined gross disburse-ments (transfer of money) totaled $24 billion,compared to nearly $25.5 billion in fiscal1998. IDA accounts for about 25 percent ofthe loans made by the Bank. The remaining75 percent of World Bank loans are market-rate loans through the IBRD.

ECA: More Loans Less IBRD Dis-bursement in Fiscal 1999

New lending commitments from the WorldBank to countries of the Europe and Cen-tral Asia (ECA) region totaled $5.29 bil-lion for 74 projects in 21 countries in fiscal1999. This figure includes market-rateloans made by the IBRD and concessional

loans from the IDA. The total compareswith $5.22 billion in fiscal 1998, and$5.05 billion in fiscal 1997. At the sametime, IBRD disbursements in fiscal 1999dropped to about half of fiscal 1998—from $4.41 billion to $2.43 billion. Thecrisis in Russia and Ukraine and theKosovo-related developments played alarge role in the negative trend. IDA dis-bursements increased a bit: amountingto $501 million, compared to $439 mil-lion in fiscal 1998. Since 1990 the Bankhas committed $38 billion to the borrow-ing countries in the ECA region.

World Bank Resumes Loan Disburse-ments to Russia

In early August the World Bank resumed thethird Structural Adjustment Loan (SAL-3)program for Russia, along with a revisedrepayment schedule. This was the Bank’sfirst cash injection for Russia since August1998. A year ago, just before crisis struck,$1.5 billion in lending was agreed on and atranche of $300 million was released. Un-der the revised agreement, the remaining$1.2 billion in the program will be paid outin four tranches ($100 million, $100 million,$400 million, and $600 million) by the endof next year. The first $100 million tranchehas been released— the rest depends onRussia’s success in implementing agreedstructural reforms such as reforming mo-nopolies in the energy sector, promotingdevelopment of the private enterprises,improving budget management, and furtherreform of the bank sector.

The World Bank also will restart two otherlending programs: one for reform ofRussia’s coal industry (the Coal 2 wasapproved in 1997) and one for strength-ening the social safety nets (Social Pro-tection Adjustment Loan, SPAL). So far$950 million of a $1.6 billion total of theseprograms was released. The remainder ofthe coal program has been revised into four50 million-dollar tranches (the first was re-mitted on July 30) and two 100 million-dollar tranches. The program is scheduledto end next June. The remaining $250 mil-lion in the social safety net program willbe released this fall.

The Fund’s Russia Analysis

According to the latest Fund report onRussia, a turnaround has occurred in1999. Industrial output in the second quar-ter was up 5 percent over the same pe-riod a year ago, the ruble has stabilized(in recent days it has shaken again), andinflation was held to 2 percent in June inresponse to budget cuts and tighter mon-etary policy. But the report also noted that“policy implementation under past pro-grams had been disappointing and thatimportant elements of the new programhad been proposed before but had notbeen carried out.” According to the report,the government’s ability to strengthen taxcollection will be critical to the new initia-tive. “Russia’s fiscal problems reflected,to an important degree, the fact that manylarge enterprises were using their politi-cal influence to avoid seizure of assets in


cases of tax delinquency,” executive direc-tors concluded in the report. The boardfound that Russia had made little progresstoward reforming its principal economic in-stitutions in the past year, particularly in bankrestructuring. It urged authorities to continueliquidating insolvent banks or to refer themto the bank restructuring agency.

Russia’s Envoy to the IMF and WorldBank Resigns

Mikhail Zadornov, Russia’s special envoyto the international financial institutions,resigned from his post on September 2,saying he will run for parliament in the elec-tions slated for December. Zadornov saidhe will seek a parliamentary seat as a can-didate of the liberal Yabloko party.

Zadornov said he believes the IMF will dis-burse the next $640 million loan installmentto Russia as scheduled. Russia and theIMF agreed on a $4.5 billion package ofloans to be used to pay back Moscow’sprevious borrowings from the IMF. The firsttranche of more than $600 million hasbeen disbursed and conditions for furtherpayments are being negotiated at present.The outgoing envoy said the money laun-dering scandal that has prompted U.S.politicians to demand further checks on theuse of any IMF money before more lend-ing is not likely to prevent the disburse-ment of the new tranche. Zadornov deniedthat Russia had misused IMF funds or thathis planned resignation has anything to dowith the ongoing probe about IMF moneybeing illegally channelled abroad.

World Bank Helps Romania Restruc-ture Mining Industry

On August 31 the World Bank approved a$44.5 million loan to Romania for a MineClosure and Social Mitigation project. Thisloan will help the government to perma-nently close 29 unproductive coal mines,with the smallest possible social and en-vironmental cost, and to streamline themanagement of the mining sector. The

Bank loan will also support the operationand creation of small enterprises, retrain-ing, and relocation for miners who are los-ing their jobs. The Bank loan will be at theBank’s standard interest rate for LIBOR-based single-currency loans, repayable in20 years, including a 5-year grace period.Romania joined the Bank in 1972, andsince 1990 its total commitments havereached about $3.5 billion for 26 projects.

IMF Credit to Romania— But Not to For-eign Creditors

In August the IMF approved a $547 millioncredit for Romania. The Fund has suggestedRomania raise $350 million on internationalcapital markets to pay back private credi-tors. Romania has so far managed to bor-row only $108 million on the private capitalmarket, reports the Financial Times. “Thisaccord is a passport allowing Romania toreturn to the international capital markets,”remarked Romanian Prime Minister RaduVasile. IMF Deputy Managing DirectorStanley Fischer encouraged Romania “tocontinue to work vigorously toward obtain-ing additional private foreign financing insupport of its reform program.” The countryhas thus become a test case for the new IMFbail in (as opposed to bail out) policy of forc-ing private creditors to provide liquidity to fi-nancially troubled countries, rather thanrelying on the IMF to do so, the FinancialTimes notes. Ukraine is another test case.

World Bank Has New CommunicationHead

Mats Karlsson, the World Bank’s new VicePresident for External Affairs and UN Af-fairs, took up his post in early September.Karlsson moved to Washington fromStockholm, where he was State Secretaryof International Development and Coop-eration at the Swedish Ministry of ForeignAffairs. He will be responsible for manag-ing the Bank’s global communications pro-grams and for reaching out to the Bank’skey constituencies— government officials,parliamentarians, NGOs, business, and

academics. He replaces Mark MallochBrown, who recently left the Bank afterbeing appointed to the position of Admin-istrator of the United Nations DevelopmentProgramme (UNDP). Actively involved indefining and executing Sweden’s interna-tional development policy for the past 16years, Mats Karlsson also took charge ofSweden’s cooperation programs withCentral and Eastern Europe. To our relish,in recent years he also co-authored sev-eral articles in Transition.

Credit to Vietnam Uses Innovative Ap-proach

On August 3 Vietnam and the World Banksigned two credit agreements: one for Viet-nam to use $80.5 million (Sanitation Project)to improve public health and promote devel-opment in three urban areas (Danang, HaiPhong, and Quang Ninh ) and another of$101.8 million to increase agricultural pro-ductivity in the Mekong Delta. “The Mekongproject will benefit 610,000 people, create80,000 new jobs, add 500,000 tons to riceproduction, and bring clean water to 280,000people,” World Bank Director Andrew Steerpointed out. The Mekong Delta accounts fornearly 30 percent of national GDP, 40 per-cent of the country’s overall agricultural pro-duction, and more than 80 percent of thecountry’s rice export. The sanitation projectuses an innovative approach: a revolvingfund, to be administered by the CityWomen’s Union, will be established in eachcity to assist low income families.

World Bank Introduces New LoanProducts

On September 1 the World Bank launchedits new loan and hedging products, offeringdeveloping countries more flexibility in man-aging their financial risks in the following ways:• A fixed-spread LIBOR-based loan willprovide increased flexibility for borrowersto tailor loan maturities and to managecurrency and interest rate risks over thelife of the loan. Borrowers will be able tochange the currency and fix, cap, or collar


the interest rate of their loan at any timeprior to the loan’s final maturity.• Hedging products, linked to borrowers’existing Bank loans, will assist borrowers inmanaging their currency, interest rate, andcommodity price risks through currency andinterest rate swaps with the Bank. Borrow-ers transacting risk-limiting hedges with theBank would need to do so under a masterderivatives agreement to be signed with theBank. Countries including Argentina, China,Colombia, Hungary, Latvia, Lithuania, andMexico have asked for the service, saidDoris Herrera-Pol, the World Bank’s man-ager for marketing and client outreach infinancial products. Since 1996 Bank bor-rowers have selected single currency loanterms for more than 95 percent of their Bankloan commitments. Borrowers also con-verted $67 billion equivalent (58 percent) oftheir currency pool loans to single currencyterms under the conversion offer that con-cluded July 1, 1998. The World Bank’s NewProducts Website is located at http://www.worldbank.org/fps.

Successful Donor Conference forKosovo

Officials from 100 donor countries and in-ternational organizations pledged suffi-cient financial support to meet about $560million of urgent human needs and imme-diate reconstruction expenses in Kosovountil the end of this year. The EuropeanCommission and the World Bank, whichjointly chaired the first donors’ conferencefor the war-torn province on July 28, saidpledges made yesterday added up to$2.08 billion, including funding already dis-bursed during 1999. The next donors’ con-ference in October will consider Kosovo’soverall reconstruction needs. The donorssaid they would give $200 million for im-mediate humanitarian aid and $45 millionto meet the costs of the UN in setting up acivil administration and paying the wagesof public servants like customs officers andteachers. The EU said it would pick up the$300 million needed until the end of theyear to help rebuild damaged housing.

Milestones of TransitionEU expansion will be staggered. GünterVerheugen, the nominee for the post of Eu-ropean Commissioner for EU enlargement,said he envisions an expansion of the EU inat least four stages, with the EU ready toaccept new members by 2002. He noted thateach aspirant will be judged on individualmerits, “which will inevitably mean variousdates for joining the EU.” Analysts say thatHungary’s position in the accession race hasremained stable, but both Poland and theCzech Republic have fallen behind. TheCzech Republic is behind because of de-layed structural reforms, poor growth expec-tations, and slow privatization of the bankingsector, while Poland has grappled with agri-cultural and environmental issues.

Central and Eastern Europe

Baltics

Rising public sector deficits. A de-crease in economic activity in the first halfof the year contributed to higher publicsector deficits in all three Baltic nations.• In Estonia the state’s fiscal shortfallreached 1.2 billion kroons (about $80 mil-lion) for the first six months of this year, theequivalent of 1.6 percent of Estonia’s GDPin 1998. The recently approved supple-mentary budget reduces governmentspending this year by 1 billion kroons.• In Latvia the state deficit in the first halfof this year was reported at 45.6 millionlats ($77 million), or 1.2 percent of 1998GDP. The overall public sector deficit forthe first half was 67.3 million lats. The gov-ernment decided to cut state expendituresby 30 million lats this year. The financeministry now forecasts a fiscal deficit thisyear of approximately 3.5 percent of GDP.• In Lithuania the state deficit in the firsthalf of this year was 394 million lits ($ 87million), or 0.9 percent of 1998 GDP.Lithuania planned a balanced budget forthis year, but finance minister JonasLionginas now says that cuts of at least800 million lits are called for in order to

rebalance the budget. The current budgetforesees expenditures of 7.2 billion lits.

Growth slows. The growth figures for theearly part of this year have been clearlyweaker than anticipated, although growthis still expected to accelerate in the sec-ond half of the year. Estonia’s finance min-istry lowered its earlier GDP growthforecast of 2.2 percent for this year to 0.4percent. The ministry also forecasts 4.1percent GDP growth for next year. In Junethe Latvian government gave its GDP fore-cast for this year as 2 percent. Now theLatvian central bank expects GDP growthof between 1–2 percent. Lithuania’s fi-nance ministry has adjusted its GDP fore-cast to 1–1.5 percent, and the economyministry now says 1.3–1.6 percent is likely.Previous GDP growth forecasts for thisyear were around 4 percent.

Unemployment is still high. Studiesbased on International Labour Organization(ILO) calculation methods show that unem-ployment averaged 9.6 percent of the la-bor force in Estonia in the second quarterof 1999. Also using ILO methods, figuresfor Latvia from November 1998 indicatedan unemployment rate of 13.8 percent.Similarly, Lithuanian unemployment in Maywas 13.1 percent.

Czech Republic

Government is preparing to sell itsstake in Komercni Banka, the country’slargest bank. Although Komercni Banka,with total assets of 402 billion crowns ($12billion), dominates corporate lending in theCzech Republic, its loan portfolio isplagued by nonperforming assets. Thebank lost 4.475 billion crowns in the firsthalf of this year. If not for the government’srecent transfer of 23 billion crowns of non-performing loans from Komercni toKonsolidacni Banka— a state-ownedbank set up to deal with bad debt—Komercni’s capital adequacy ratio would


have fallen to about 4 percent, far short ofcentral bank requirements. The govern-ment intends to subscribe to at least halfof the 9.5 billion crowns capital increase,doubling Komercni’s share capital andboosting the state’s stake in the bank tomore than 50 percent. This would makethe bank more attractive to potential inves-tors as they would gain full control ofKomercni. A group of local minority share-holders in the bank have challenged theseplans. Many analysts in Prague believe thatKomercni’s loan portfolio will need furtherrestructuring next year. By some estimates,the bank’s problem loans will fall between45 billion to 50 billion crowns, of whichsome 70 percent are irrecoverable.

Poland

Poland’s current account deficit wid-ens. Poland, Eastern Europe’s smooth-est-sailing economy, is hitting rough seas,according to the Wall Street Journal.Poland’s current account balance showeda deficit of $1 billion for July, indicatingthat slow economic growth in Germanyand Italy and economic collapse in Rus-sia have dealt a heavy blow to Polish ex-ports. If this trend continues, the currentaccount deficit could amount to between6–7 percent of GDP for 1999, which wouldbe the nation’s highest ever. Economicgrowth is slowing, FDI is lagging, and thecentral government’s budget deficitthreatens to overshoot its 1999 target.Overhaul of the coal mining sector and itshealth care and pension systems areproving costly. Those expenses havepushed the central government’s 1999budget deficit to 97 percent of its plannedtarget for the year— 2.15 percent of GDP—at the end of July. Domestic growth has alsoslowed. While Poland’s finance ministrypredicts that GDP will show 3 percentgrowth in the second quarter, that still lagsbehind the 5.3 percent increase the coun-try enjoyed during the earlier period. FDIwas down 48 percent in July, compared withJuly of 1998. If that trend continues, FDI inPoland will cover only half of its current-ac-

count deficit, as compared with 75 percentin 1998.

CIS

Higher industrial production in mostCIS countries. The Commonwealth of In-dependent States (CIS) Interstate Statis-tics Committee reports that eight CISstates increased industrial output in thefirst half of 1999. Compared to the first halfof 1998, industrial output rose in Tajikistanby 7.9 percent, in Belarus by 7.0 percent,in Uzbekistan by 5.6 percent, in Russia 3.1by percent, in Armenia by 2.8 percent, inAzerbaijan by 2.0 percent, in Georgia by0.6 percent, and in Ukraine by 0.2 percent.Industrial output was down in Moldova by15.2 percent, in the Kyrgyz Republic by10.0 percent, and in Kazakhstan by 4.1percent.

Russia

New investment law. In mid-July a new for-eign investment law came into force in Rus-sia, intended to protect investors’ rights andguarantee that tax obligations will not sud-denly change. It defines foreign investment asa project with at least 1 billion rubles ($41 mil-lion) of foreign investment or when a foreigninvestor has at least 100 million rubles in thecharter capital of a company. The law doesnot apply to foreign investors with stakes inRussian banks or portfolio investors. The lawalso defines the rights of foreign investors,freezes tax rates for investment projects forseven years, and prohibits changes to tax orcustoms laws that hurt investors’ profits by re-gions or the federal government.

The decline in Russia’s populationshows no sign of ending. With a furtherfall of up to 8 million people expected by theyear 2016, the Washington Times reportsthat Russia’s population, now at around 146million people, has been in steady declinefor the past decade— a trend that will likelycontinue. Experts blame factors such as adrop in medical standards, poor nutrition,and fewer women giving birth.

AIDS cases exploding. Vadim Pokrovskii,head of the Russian Research Center for thePrevention of AIDS, said in July that a lackof prevention and public education in Rus-sia has led to a surge in the number ofpeople infected with the HIV virus.Pokrovskii said there has been a 12-foldincrease in the number of HIV-infectedpeople in the Moscow area during the firstsix months of this year, compared with thesame period in 1998. He also said thatRussia lacks the money to keep the dis-ease from spreading and that the diseasemost commonly passes into the hetero-sexual population via drug-using prosti-tutes. The Health Ministry reported thatalmost 16,000 HIV-positive cases wereregistered in the country as of last month.

Asia’s Reforming Economies

China

China’s parliament approves twogrowth-boosting economic measures.Income tax exemption for bank deposit in-terest had been repelled in China. The newtax on savings interest is aimed at boost-ing domestic consumption and ending a22-month slide in retail prices that is bruis-ing China’s producers. The tax measureis intended to discourage savings and pro-pel some of the 5,900 billion yuan (about$72 billion) of private savings into theeconomy. The tax will also amass revenuefor increased unemployment subsidies. Aspecial 60 billion yuan bond issue will fi-nance a wide-ranging spending programin infrastructure, technology, and environ-mental protection projects aimed at re-versing the sharp drop in domesticinvestment. Fixed-asset investment rosejust 3.8 percent on the year in July, downfrom 22.7 percent growth in the first quar-ter of the year. Dampened by dwindlinginflows of foreign investment, weak ex-ports, and falling prices, China’s economygrew just 7.1 percent in the second quar-ter of this year, down from 8.3 percent inthe first quarter. In the past three monthsBeijing has cut interest rates for the fourthtime since March 1998.


New Books and Working PapersThe Macroeconomics and Growth Group regrets that it is unable to provide the publications listed.

World Bank Publications

To receive ordering and price informationfor World Bank publications, contact theWorld Bank, P.O. Box 7247-8619, Phila-delphia, PA 19170, United States, tel: 202-473-1155, fax: 202-676-058, email:[email protected], Internet: http://www.world bank.org or http://www.worldbank.org/html/dec/Publications/Workpapers/tranecon.htm, or visit the WorldBank bookstore in the United States, at701 18th Street, NW, Washington, DC, orFrance, at 66 avenue d’Iena, 75116 Paris.

Working Papers

Asl Demirgüç-Kunt and Ross Levine,Bank-Based and Market-Based Finan-cial Systems: Cross-Country Com-parisons, WPS 2143, July 1999, 68 pp.

In bank-based financial systems banks playa leading role in mobilizing savings, allo-cating capital, overseeing the investmentdecisions of corporate managers, and pro-viding risk management vehicles, as inGermany and Japan. In market-based fi-nancial systems securities markets sharecenter stage with banks in getting society’ssavings to firms, exerting corporate control,and easing risk management, as in En-gland and the United States. What are therelative advantages and disadvantages ofeach of these systems?

Analyzing newly collected data on a cross-section of roughly 150 countries, someclear patterns emerges:• In higher income countries, stock mar-kets become more active and efficientthan banks. Thus financial systems tendto be more market-based.• Countries with a common law tradition,strong protection for shareholder rights,good accounting standards, low levels ofcorruption, and no explicit deposit insur-

ance tend to be more market-based, evenafter controlling for income.• Countries with a French civil law tradi-tion, poor accounting standards, heavilyrestricted banking systems, and high infla-tion generally tend to have underdevelopedfinancial systems, even after controlling forincome.To order: Kari Labrie, Room MC3-456, tel:202-473-1001, fax: 202-522-1155, email:[email protected]. The authors may becontacted at [email protected] [email protected].

Jean-Paul Azam, Shantayanan Devarajan,and Stephen A. O’Connell, Aid Depen-dence Reconsidered, WPS 2144, July1999, 14 pp.

When foreign aid undermines institutions,countries can become aid-dependent,even if donors and recipients have the bestintentions. When foreign aid underminesinstitutional development, aid recipientscan exhibit the symptoms of aid “depen-dence— benefiting from aid in the shortterm but damaged by it in the long term.To order: Hedy Sladovich, Room MC2-609,tel: 202-473-7698, fax: 202-522-1154, email:[email protected]. The authorsmay be contacted at [email protected], [email protected], [email protected].

Thorsten Beck, Ross Levine, and AsliDemirgüç-Kunt, A New Database on Fi-nancial Development and Structure,WPS 2146, July 1999, 63 pp.

A new database of indicators that mea-sure the size, activity, and efficiency of fi-nancial intermediaries (nonbank financialinstitutions) and capital markets can showthe financial development and structureacross countries and over time.To order: Kari Labrie, Room MC3-456, tel:202-473-1001, fax: 202-522-1155, email:

[email protected]. The authors maybe contacted at [email protected],[email protected], or [email protected].

Constantine Michalopoulos, DevelopingCountry Goals and Strategies for theMillennium Round, WPS 2147, July1999, 41 pp.

Many developing countries have been re-luctant to participate in multilateral tradenegotiations although they can gain sig-nificant benefits from a broader WTO Mil-lennium Round of negotiations once theydevelop proper strategies. They shouldembrace industrial tariffs and trade-relatedaspects of intellectual property rights,trade-related environmental issues, andgovernment procurement. Liberalizationof their own trade with realistic transitionperiods and technical assistance to ad-dress constraints on their institutional ca-pacity in exchange for improved accessto the markets of their trading partners isthe only way to maximize benefits frommultilateral trade negotiations.To order: Lili Tabada, Room MC3-333,tel: 202-473-6896, fax: 202-522-1159,email: [email protected]. The au-thor may be contacted at [email protected].

Martin Ravallion and Michael Lokshin,Who Wants to Redistribute? Russia’sTunnel Effect in the 1990s, WPS 2150,July 1999, 26 pp.

Few Russians expected rising living stan-dards in the 1990s; most expected a de-cline, so there was strong demand forredistribution, even among those currentlywell off but fearful of the future. Some 72percent of the 7,000 adults surveyed inOctober 1996 favor government action toreduce incomes of the rich. But the other28 percent were not only the currently “rich.”


Women tend to favor redistribution morethan men do.To order: Patricia Sader, tel. 202-473-3902, fax: 202-522-1153, email: [email protected] Ravallion may becontacted at [email protected].

Francisco Ferreira, Giovanna Prennushi,and Martin Ravallion, Protecting thePoor from Macroeconomic Shocks,WPS 2160, August 1999, 24 pp.

To minimize the harmful impact of mac-roeconomic shocks on the poor, govern-ments and civil society need to beprepared for a flexible response wellahead of the crisis, primarily setting upan effective permanent safety net, com-bining a workfare program with targetedtransfers and credit. Once a crisis hashappened, the following should occur:• Macroeconomic policies should aim toachieve stabilization goals at the least costto the poor. Temporary reduction in aggre-gate demand is inevitable but as soon asa sustainable external balance has beenreached and inflationary pressures havebeen contained, macroeconomic policyshould be eased (interest rates reducedand efficient public spending restored, tohelp offset the worst effects of the reces-sion on the poor). A fiscal stimulus directedat labor-intensive activities (such as build-ing rural roads) can combine the benefitsof growth with those of income support forpoor groups.• Key areas of public spending— espe-cially investments in health care, educa-tion, rural infrastructure, urban sanitation,and microfinance— should be protected.• Efforts should be made to preserve thesocial fabric and build social capital.• Sound information should be generatedon the welfare impacts of the crisis.To order: PREM Advisory Services,Room MC3-825, tel: 202-458-7736, fax:202-522-1135, email: [email protected]. The authors may be con-tacted at [email protected],[email protected], or [email protected].

Maurice Schiff, Will the Real “NaturalTrading Partner” Please Stand Up?WPS 2161, August 1999, 25 pp.To order: Maria Kasilag, Room MC3-321,tel: 202-473-9081, fax: 202-522-1159, email:[email protected]. The author maybe contacted at [email protected].

Estelle James, Coverage under Old-Age Security Programs and Protectionfor the Uninsured— What Are the Is-sues? WPS 2163, August 1999, 21 pp.

The shift toward social security systemswith a tighter link between benefits andcontributions will make such systems morefiscally sustainable. But to protect the un-insured and underinsured, such programsshould be complemented by better socialassistance programs for low-incomegroups, primarily workers who spendmuch of their lives in agriculture or the in-formal sector (often self-employed or insmall firms) and women who, havingworked mostly in the household, expect tobe supported by a family system that mayfail them in old age.To order: Marianne Leenaerts, Room G2-030, tel: 202-458-4264, fax: 202-676-0961, email: [email protected] author may be contacted at [email protected].

Martha de Melo and Gur Ofer, The Rus-sian City in Transition: The First SixYears in 10 Volga Capitals, WPS 2165,August 1999, 58 pp.

While authors welcome the relative suc-cess of reform in majority of 10 regionalcapitals along the Volga River, they pointout that a major difficulty facing Russiancities is the cost of subsidies to housingand utilities. Real estate constitutes amajor expenditure category for local gov-ernment rather than, as in most westerncities, a major source of revenue. With thecredibility of Russia’s federal governmentat an all-time low, foreign investors haveto rely on the competence and reliabilityof local leaders, especially mayors and

governors. They will be looking for evi-dence of accountability in the form of therule of law and transparency in the form ofreliable public information.To order: Hedy Sladovich, Room MC2-609, tel: 202-473-7698, fax 202-522-1154, Internet address: [email protected]. The authors may becontacted at [email protected] [email protected].

Simon Johnson, Daniel Kaufmann, andPablo Zoido-Lobatón, Corruption, PublicFinances, and the Unofficial Economy,WPS 2169, August 1999, 51 pp.

Analyzing a sample of 49 developing (LatinAmerican), transition, and industrial econo-mies, the authors conclude that ineffectiveand discretionary administration of tax andregulatory regimes, as well as corruption,are responsible for increases in the size ofthe unofficial economy— not just higher taxrates. And countries with a larger unofficialeconomy tend to grow more slowly.

Wealthy OECD economies and some East-ern European economies find themselves inthe “good equilibrium” of relatively low regu-latory and tax burden (not necessarily low taxrates), sizable revenue mobilization, goodrule of law and control of corruption, and asmall unofficial economy. Several countriesin Latin America and the former Soviet Unionexhibit characteristics consistent with a “badequilibrium:” the discretionary application ofheavy regulatory and tax burdens, the weakrule of law, heavy bribery, and an active unof-ficial economy.To order: Diane Bouvet, Room G2-136, tel:202-473-5818, fax: 202-334-8350, email:[email protected]. The authors maybe contacted at [email protected] [email protected].

Gudrun Kochendorfer-Lucius and BorisPleskovic, (eds) , Development Issuesin the 21st Century , Villa Borsig Work-shop Series 1998, in cooperation with theGerman Foundation for International De-velopment (DSE), 1998, 210 pp.


IMF Publications

To order, contact IMF Publication Services,700 19th Street, NW, Washington, DC,20431, United States, tel: 202-623-7430, fax:202-623-7201, email: [email protected],Internet: http://www.imf.org.

Michael Mussa and Miguel A. Savastano,The IMF Approach to Economic Stabi-lization, WP/99/104, 1999.

Torbjorn Becker, Public Debt Manage-ment and Bailouts, WP/99/103, 1999.

Chris Jarvis, The Rise and Fall of thePyramid Schemes in Albania, WP/99/98, 1999.

Joannes Mongardini and Johannes Muller,Rachet Effects in Currency Substitu-tion— An Application to the KyrgyzRepublic, WP/99/102, 1999.

Joshua Charap and Christian Harm, In-stitutionalized Corruption and theKleptocratic State, WP/99/91, 1999.

Matthieu Bussiere and Christian Mulder,External Vulnerability in EmergingMarket Economies— How High Liquid-ity Can Offset Weak Fundamentalsand the Effects of Contagion, WP/99/88, 1999.

Liang Hong, Do Hong Kong SAR andChina Constitute an Optimal CurrencyArea? An Empirical Test of the Gener-alized Purchasing Power Parity, WP/99/79, 1999.

Andrew Berg, Eduardo R. Borensztein,Ratna Sahay, and Jeromin Zettelmeyer,The Evolution of Output in TransitionEconomies— Explaining the Differ-ences, WP/99/73

* * * * *

Central European UniversityPublications

To order, contact CEU/OSI PublicationsOffice, H-1051 Budapest, Nadoru. 9,Hungary, tel: 361-327-3222, fax: 361-327-3820, email: [email protected],Internet: http://www.ceu.hu./

András Bozoki, (ed.), Intellectuals andPolitics in Central Europe, 1998.

Tibor Várady, John J. Barcelo III, and Arthurvon Mehren, International CommercialArbitration-A Transnational Perspec-tive, 1999.

* * * * *

Edward Elgar Publications

To order, contact Edward Elgar Publishing,136 West Street, Suite 202, Northhamptom,MA 01060, United States, tel: 800-390-3149, Internet: http://www.e-elgar.co.uk. orGlensanda House, Montpellier Parade,Cheltenham, Glos, GL50 1UA, UnitedKingdom, tel: 44-1242-226934, fax: 44-1242-262111, email: [email protected]

Attila Agh, Emerging Democracies inEast Central Europe and the Balkans,1998, 368 pp.

Horst Brezinski, Egon Franck, and MichaelFritsch, (eds.), The Microeconomics ofTransformation and Growth, 1998, 288pp.

Transformation often is treated in a cook-book manner rather than as a game ofchess— that is step-by-step procedure withaction, evaluation, and feedback. Conse-quently, during transition the institutional andeconomic conditions of the target model arenot clear. Economic institutions with formaland informal rules and norms were devisedto shape human interaction and help solveeconomic problems.The essays in thisbook show a variety of approaches to un-derpin economic analysis of transformationfrom a microeconomic point of view.• Neoclassical theory. This theory isbased on the assumption that reallocation

of resources based on prices of unre-strained free markets increase the effi-ciency of the system and leads to generalequilibrium of competitive markets. It as-sumes that markets are mere aggregationand interaction of maximizing individualswith stable and given preference functions,thus ignoring asymmetric and incompleteinformation and regard institutional frame-work as given.• Institutional economics. In this sys-tem economic actors are conceived of asindividuals with bounded rationality and in-complete information who do not take allalternatives and consequences into ac-count. This results in loss of economicvalue. Institutions can serve as “surrogatesof rationality.” Compatibility between lay-ers of the institutional system— includingbasic cultural norms and traditions in asociety— is a constraint that has to betaken account in a transforming environ-ment through coordination and motivation.• Evolutionary economics. This theoryrejects the principles of the neoclassicalmodel and believes in heterogeneity ofbehavior— different economic agents maybehave differently under the same circum-stances. Economic agents follow certaindecision routines— established routinesleading to path dependency, or a continu-ity of firm behavior in a changing economicenvironment. This suggests that a firm intransition can hardly follow any single op-timal strategy to overcome its problems.The imprinted routines of the socialist pastcan constitute a considerable bottleneckin an open economy. Microeconomicanalysis can play a major role in identify-ing routines that can cope with enterprises’required change.

Terry Cox and Bob Mason, Social and Eco-nomic Transformation in East CentralEurope-Institutions: Property Relationsand Social Interests, Studies of Commu-nism in Transition series, 1999, 230 pp.

Governments of the Czech Republic, Hun-gary, and Poland have experienced prob-lems in implementing economic reforms,


which have had to be weighed against in-creasing inequalities, growing unemploy-ment, poverty, and the discontent of thepublic. Electorates in Hungary and Polandturned their backs to the liberal democratsand national conservatives in the mid-1990s and brought to power the socialists,initially reform communists. Four yearslater, right-of-the-center parties formed thegovernment in both countries. In the CzechRepublic the liberal-conservative coalitiongradually split up and the social democratswere able to form a minority government.These countries cannot afford to pay thehigh cost of social support structures andare attempting to reform pension, health,and other social support reforms. This isthe most important “unfinished business”of the transformation process.

David A. Dyker (ed.), Foreign Direct In-vestment and Technology Transfer inthe Former Soviet Union, 1999, 208 pp.

Saul Estr in, Marko Simoneti , andAndreja Bohm (eds .), The Gover-nance of Privatization Funds: Expe-riences of the Czech Republic,Poland, and Slovenia , 1999, 208 pp.

Privatization investment funds are the keyfeature of mass privatization programs intransition economies. This book surveysmass privatization programs in the CzechRepublic, Poland, and Slovenia, comple-mented with extensive empirical analysis.

Janos Gacs, Robert Holzmann, andMichael L. Wyzan (eds), The Mixed Bless-ing of Financial Inflows— TransitionCountries in Comparative Perspective,Joint publication with International Institutefor Applied System Analysis, IIASA,Vienna, 1999, 253 pp.

Successful macroeconomic stabilization inCentral and Eastern European countrieshas encouraged inflows of foreign capitalbadly needed to promote economic devel-opment. Strikingly, these countries havefound capital inflows in their various forms

to be a mixed blessing, with its adverse ef-fects on inflation, the exchange rate and thecurrent account, and difficulties to containdisturbances resulting from reversals of theflows. This book investigates recent expe-riences in Central and Eastern Europe andcontrasts those with experiences from LatinAmerica and East Asia. It concludes thatseveral features are similar. However, cer-tain unique characteristics such as datalimitations and the fragility of the bankingand financial systems compound the prob-lems faced by policymakers in Central andEastern Europe.

Christian Helmenstein (ed.), Capital mar-kets in Central and Eastern Europe,1999, 256 pp.

The first part of the book presents casestudies on the transition process as expe-rienced in eleven countries. It outlines therole of monetary policy in macroeconomicstabilization, the characteristics of bankingsystems, the transfer of corporate owner-ship through privatization, the dynamics ofexchange-related trading, and the impor-tance of international funding. In the secondpart the authors present an in-depth analy-sis focusing on specific issues includingmarket efficiency, financial risk, a compara-tive assessment of central bank indepen-dence, foreign debt settlement, and theprivatization process.

Gernot Hutschenreiter, Mark Knell, andSlavo Radosevic, Restructuring Innova-tion Systems in Eastern Europe,1999,300 pp.

Iván Major (ed.), Privatization and Eco-nomic Performance in Central and East-ern Europe— Lessons to Be Learnt fromWestern Europe, European Associationfor Comparative Economic Studies series,1999, 390 pp.

Comprehensive analysis of the impact ofprivatization in Bulgaria, Estonia, Hungary,and Poland, the book sheds new light onthe achievements and shortcomings of that

process. The strongest financial standingand the fastest growth has been recordedby foreign-owned companies, although inmost cases those were the flagship, state-owned companies before privatization.Government officials were less efficient“agents” at selling companies than man-agers of the firms were. Privatization withthe ESOP-type privatization is mixed. Inmost larger companies workers could notfunction as owners so the companies wentbankrupt or were sold to the managers.

Tony Verheijen (ed.), Civil Service Sys-tems in Central and Eastern Europe,Civil Service Systems in ComparativePerspective series, 360 pp.

A comprehensive comparative analysis ofthe emerging civil service systems in nineCentral and East European states pro-vides insight into the emerging patterns ofadministrative development in the region.

Daniel Vaughan-Whitehead, Albania inCrisis— The Predictable Fall of theShining Star, 1999, 384 pp.

At the beginning of the 1990s the firstencouraging results on GDP growth com-bined with the fulfillment of international re-quirements led many to believe that Albaniawas a shining star of economic developmentin Central and Eastern Europe. But in 1997this progress was reversed by unprecedentedinstitutional, political, and social turmoil lead-ing to a spiral of violence and chaos. The au-thor provides a comprehensive economicanalysis on Albania and identifies the majorreasons for the 1997 explosion. The collapseof the pyramid scheme was just the lastdrop— the breakdown of the industrial produc-tion, failure of mass privatization, paralysis ofthe banking system, and rampant poverty fu-eled discontent to breaking point.

* * * * *

Publications of Federal Institute for Rus-sian, East European and InternationalStudies Cologne, Germany, Berichte


des Bundesinstituts fur Ostwissen-schaftliche und Internationale Studien(BIOSt) (In German, with English summa-ries)

To order, contact BIOst, Lindenbornstr. 22,D-50823 Köln, Germany, fax: 049-221-5747-110, email: [email protected],Internet: http://www.biost.de/biopubl.htm.

Aleksej Surubovic and Natalija Usakova,The Presence of the Russian Economyin the CIS. Part I: Material Production;Part II: Financial Relations, No. 9 and 10,February 1999, 24 pp. and 30 pp.

Heiko Pleines, The Post-Soviet Crisisof the Russian Coal Industry, No 19,May 1999, 34 pp.

Ognian Hishow, The Russian Economyafter the Farewells to the Reformers.Economic Policy Stagnation and theDebt Trap, No 22, June 1999.

* * * * *

SIGMA Publications

To order, contact Head of PublicationsService, OECD, 2 rue André-Pascal,75775 Paris Cedex 16, France, tel: 331-4524-7900, fax: 331-4524-1300, email:[email protected], Internet: http://www.oecd.org/puma/sigmaweb.

Sustainable Institutions for EuropeanUnion Membership, SIGMA Paper no.26, 1998, 26 pp.

Public Opinion Surveys as Input toAdministrative Reform, SIGMA Paperno. 25, 1998, 106 pp.

* * * * *

The Royal Institute of International Af-fairs Publications

To order, contact The Royal Institute ofInternational Affairs, Chatham House,

10 St. James’s Square, London SW1Y4LE, United Kingdom, tel: 0171-957-5700, fax: 0171-957-5710, Internet: http://www.riia.org.

Neil MacFarlane, Western Engagementin the Caucasus and Central Asia, Cen-tral Asian and Caucasian Prospects,1999, 72 pp.

Richard Pomfret, Central Asia TurnsSouth? Central Asian and CaucasianProspects, 1999, 46 pp.

* * * * *

University of Leicester Publications

To order, contact Faculty of Social Sci-ences, Department of Economics, Uni-versity of Leicester LE1 7RH, UnitedKingdom, tel: 0116-252-2892, fax: 0116-252-2908.

Zbigniew Kominek, Stable Distribu-tions and Returns on the WarsawStock Exchange: The Minimum Chi-Square Estimation , No. 99/11, April1999, 37 pp.

Cornelia Scutaru and Adrian Ghita, Chaosand Order in Transition: Social Costs(Inflation, Unemployment) and Ex-change Rate Policy. Case of Romania,No. 99/9, April 1999, 18 pp.

Robert Lensink and Elmer Sterken, Capi-tal Market Imperfections, Uncertainty,and Corporate Investment in the CzechRepublic, No. 99/8, March 1999, 21 pp.

Tomasz Kopczewski , ProductivityGrowth in the Polish Banking Sector:Bootstrapping Dea-Based MalmquistProductivity Index Approach, No. 99/7, April 1999, 37 pp.

Constantin Ciupagea, Rigidities of theLabor Market in a Transition Economy:The Case of Romania, No. 99/6, April1999, 44 pp.

Wojciech W. Charemza and GeominaPopescu-Turlea, Internal Foreign Ex-change Markets and Hyperinflationduring Transition: The Case of Roma-nia, No. 99/5, March 1999, 22 pp.

* * * * *

Other Publications

Edgar L. Feige and Katarina Ott (eds.),Underground Economies in Transi-tion: Unrecorded Activity, Tax Evasion,Corruption, and Organized Crime,Ashgate, United States, 1999, 336 pp.To order: Ashgate, Old Post Road,Brookfield, Vermont 05036, UnitedStates, tel: 800-535-9544, fax: 802-276-3837, email: [email protected].

Richard J. Hunter, Jr., and Leo V. Ryan, FromAutarchy to Market: Polish Economicsand Politics, 1945–1995, Praeger Publish-ers, United States, 1998, 304 pp.To order: De Paul University, Departmentof Management, 1 East Jackson Boule-vard, Chicago, Illinois 60604-2287, fax:312-362-6973.

Inflation Targeting: Lessons from theInternational Experience , PrincetonUniversity Press, January 1999.To order: Princeton University Press, 41William Street, Princeton, New Jersey08540, United States, tel: 609-258-5714,fax: 609-258-1335.

Piotr Jasinski and Helen Lawton Smith, (eds.),Environmental Regulation in Transform-ing Economies: The Case of Poland,Ashgate, United States, 1999, 384 pp.To order: Ashgate, Old Post Road,Brookfield, Vermont 05036, UnitedStates, tel: 800-535-9544, fax: 802-276-3837, email: [email protected].

Russell R. Miller, Selling to Newly Emerg-ing Markets , Greenwood PublishingGroup Inc., United States, 1998, 288 pp.To order: Greenwood Publishing Group,Inc., 88 Post Road West, P.O. Box 5007,


Westport, CT 06881-5007, United States,tel: 203-226-3571, fax: 203-222-1502,Internet: http://www.greenwood.com.

Peter S. Rashish (ed.), A New Approachfor the Transatlantic Economic Partner-ship: Report of the European Institute8th Annual Transatlantic Seminar onTrade and Investment, November 4–5,1998, The European Institute, 1999, 82 pp.To order: The European Institute, 5225Wisconsin Avenue, NW, Suite 200,Washington, DC 20015-2014, tel: 202-895-1670, fax: 202-362-1088, email:[email protected].

Maria Romanowska, Michal Trocki, andBogdan Wawrzyniaket (eds), FinancialGroups in Poland, (Grupy kapitalowew Polsce), Difin Publishing, Warsaw, Po-land, 1998. 491 pp.

Financial groups increasingly shaperules, institutions, beliefs, and norms athome and globally. The book provides acomprehensive overview of the formationand governance of financial groups inPoland. State monopolies were the oldmonsters; since their weakening and de-mise in the early 1990s, financial groupsare replacing them. They are neither com-pletely private nor public. As to their scale,concentration, historical heritage, con-nections with the government, and con-trol of their own activities, they markedlydiffer from their western counterparts.

Maria Romanowska’s paper, “FinancialGroup Strategies in Poland,” explores thedangers of recreating the old monopolisticmonsters into new formations. Poland shouldset up lobby groups representing variousbranches of Poland’s industry in order to in-fluence decision-making bodies in the Euro-pean Union, argues Krzysztof Popowicz in hisessay, “Polish Financial Groups in Negotia-tions with the European Union.” WieslawGrudzewski and Helena Hejduk in their study“The Holding Company as Instrument for Re-structuring Key Industry in Poland” challengethe idea of restructuring major Polish enter-

prises into holding companies. Reviewed byMaria Aggestam, School of Economics andManagement, Lund University Sweden,email: maria.aggestam @fek.lu.se

Axel Siedenberg and Lutz Hoffman, (eds.),Ukraine at the Crossroads: EconomicReforms in International Perspective,Physica-Verlag Heidelberg, New York,1999, 437 pp.

Part I, a macroeconomic review of the trans-formation process, provides a comprehen-sive overview of economic development inthe East European and CIS transformationcountries. John Odling-Smee and OlehHavrylyshyn identify three country catego-ries: sustained growth, artificial growth, andzero growth, with Ukraine belonging to thelatter. Part II covers issues that have beenneglected for too long in the transformationdebate: institutional change as a precon-dition for any reform. Part III addressesstructural change in what is the key institu-

tion for any capitalist market economy— thefinancial sector. Part IV is dedicated to ag-riculture, and Part V covers reform of theenergy sector, sometimes perceived as theAchilles’ heel of the Ukrainian economy.

Whatever the macroeconomic figures, themajor transformation still confrontingUkraine is a change in the mindset ofpeople— the perception that while themove from socialism to a market economycan indeed be accomplished, short-termapproach in politics leads to proliferationof inefficient structures and policies ratherthan to their eradication. [See also leadarticle in this issue. The Editor].

World Disasters Report 1999, InternationalFederation of Red Cross and Red CrescentSocieties, Switzerland, 1999, 198 pp.To order: Edigroup, Case postale 393,1225 Chene-Bourg Switzerland, tel:4122-348-4428, fax: 4122-348-4422,email: [email protected].

From the World Press Review.

Demographic Survey


Bibliography of Selected ArticlesCentral and Eastern Europe

Buch, C., R. P. Heinrich, and D. Piazolo. Fi-nancial Flows to Transitional Economiesin an Integrated Europe. MOST (Nether-lands), vol. 9:89-122, 1999.

Croatia: Financial Times Survey. Fi-nancial Times (United Kingdom) pp.23-26, July 9, 1999.

Goodnow, J. D. International BusinessTransformation Patterns of Czech En-terprises Since the Velvet Revolutionand the Velvet Divorce. Prague Eco-nomic Papers (Czech Republic) 8:178-88, June 1999.

Hall, T. W. Poland and Russia One De-cade after Shock Therapy. Journal ofEconomic Issues (United States) 33:305-14, June 1999.

Mannix, R. Local Hires the Key to Suc-cess in Hungary. International FinancialLaw Review (United Kingdom) 18:45-53,June 1999.

Myant, M. Czech Enterprises: TheBarriers to Restructuring. PragueEconomic Papers (Czech Republic)8:163-77, June 1999.

Ostaszewska, A. Albania: Reform of In-come Taxation. European Taxation(Netherlands) 39:276-79, August 1999.

Petrovic, P. The Yugoslav Hyperinfla-tion of 1924–1994: Causes, Dynamics,and Money Supply Process. Journal ofComparative Economics (United States)27:335-53, June 1999.

Pleskovic, B., Challenges for the NewEconomic Geography in the 21st Cen-tury, International Regional Science Re-view (United Kingdom) 22(2): 139-41,1999.

Testa, D. Confidence Is Returning.Central European (United Kingdom)9:44-45, July/August 1999. Electronicaccess: Full text: ProQuest Direct data-base; http://jolis.worldbankimflib.org/uhtbin2/UMIperiod.pl?11291.

Romania and Bulgaria: The Tortoiseand the Hare. Economist (United King-dom) 352: 40, August 7-13, 1999. Elec-tronic access: Full text: ProQuest Directdatabase; http://jolis.worldbankimflib.org/uhtbin2/UMIperiod.pl?28390.

Véghelyi, M. Hungary: Special Tax In-vestigation Unit. European Taxation(Netherlands) 39:279-81, August 1999.

Asia

Asia’s Economies: On Their FeetAgain? Economist (United Kingdom)352:16-18, August 21-27, 1999. Elec-tronic access: Full text: ProQuest Directdatabase; http://jolis.worldbankimflib.org/uhtbin2/UMIperiod.pl?28390.

Bickers, C. Asia’s Race To Go Digital.Far Eastern Economic Review (HongKong) 162:8-12 July 1, 1999. Electronicaccess: Full text: ProQuest Direct data-base; http://jolis.worldbankimflib.org/uhtbin2/UMIperiod.pl?23566.

Blayney, S. Reforming China’s AssetAppraisal Regime. International Finan-cial Law Review (United Kingdom),18(7):27-29, July 1999.

Das Gupta, M. Gender Bias in China,South Korea and India 1920-1990: Ef-fects of War, Famine and Fertility Decline.Development and Change (Netherlands)30:619-52, July 1999.

Foster, T. Vietnam Shows New Faceto Foreign Investors. International Fi-nancial Law Review (United Kingdom)18:55-56, June 1999. Electronic ac-cess: Full text: ProQuest Direct data-base; http://jolis.worldbankimflib.org/uhtbin2/UMIperiod.pl?14903.

Houben, H. China Economic Reformsand Integration into the World TradingSystem. Journal of World Trade (Switzer-land) 33(3):1-18, June 1999.

Sarno, L. Hot Money, Accounting La-bels, and the Permanence of CapitalsFlows to Developing Countries: AnEmpirical Investigation. Journal of De-

velopment Economics (Netherlands)59:337-64, August 1999.

Stahl, T. New Operators: DeregulationComes to China’s Domestic Telecom-munications Industry. China Trade Re-port (Hong Kong) 37:12-13, July 1999.

Wo, L. China Unveils Unified ContractLaw. International Financial Law Review(United Kingdom) 18:17-22, June 1999.

Xiaolu, W. Ups and Downs: Fluctua-tions in Economic Growth Damage theEconomy. China Trade Report (HongKong) 37:7, July 1999.

Yao, Y. Rural Industry and Labor MarketIntegration in Eastern China. Journal ofDevelopment Economics (Netherlands)59:463-96, August 1999.

CIS

Clemens, W. C., Jr. The Baltic Repub-lics, Russia, and Energy: From Depen-dency to Interdependence? SAIS Review(United States) 19:190-208, Winter-Spring 1999.

Conway, P. Privatization and Price Con-vergence: Evidence from Four Marketsin Kyiv. Journal of Comparative Eco-nomics (United States) 27:231-57, June1999.

Kandiyoti, D. Poverty in Transition: AnEthnographic Critique of HouseholdSurveys in Post-Soviet Central Asia.Development and Change (Netherlands)30:499-524, July 1999.

Kazakhstan: Financial Times Survey.Financial Times (United Kingdom),Suppl.: I-IV, July 1, 1999.

Komashenko, A. Personal Taxation inthe Ukraine. Tax Planning InternationalReview (United Kingdom) 26:15-16, Au-gust 1999.

Russia to Press for Broad Revampof Soviet-Era Debt. Wall Street Jour-nal (United States), p. A17, July 28,1999.

The W orld Bank1818 H S treet, N .W .W ashington D.C. 20433Telephone: 202-477-1234Fax: 202-477-6391W orld W ide W eb :

http://www.worldbank.org/

701 Tappan Street, 9th FloorAnn Ar b or, M I 48109-1234, U .S.A.

tel. 734-763-5020fax 734-763-5850

Editor: Anna M eyendorffAmeyen@ u m ich.eduAssociate Editor: Sharon N akpairatSharon_N akpairat@ ccmail.b u s.u m ich.edu

We appreciate the support of:

We look forward to establishing similar agreements with other sponsors— whetherindividuals or companies. Please contact the editor for more details.

If you would like to receive the Transition Newsletter electronically, please email Jenni-fer Prochnow: [email protected]

Subscribe to TRANSITION

If you are not currently on our subscription list, beginning in calendar year 1999 youmay receive TRANSITION on a complimentary basis by writing to:

Jennifer ProchnowThe World Bank,

1818 H Street, N.W.Room MC3-374

Washington, D.C. 20433, USAtelephone: 202-473-7466

fax: 202-522-1152Email: [email protected]

For a free subscription to the Russian language version of TRANSITION, write to:

International Centre for Policy Studies8/5, Voloska St.

Kyiv, Ukraine 254070telephone: +380 44 4636337

fax: +380 44 462 4937, 38Email: [email protected]

Website: http://www.icps.kiev.ua

Senior Editor : R ichard H irschlerTelephone: 202-473-6982Fax: 202-522-1152Em ail: rhirschler@ w orldbank.org

P rodu ction M anager : Jennifer ProchnowTelephone: 202-473-7466Fax: 202-522-1152Em ail: jprochnow @ w orldbank.org

TR AN S I TIO N

Printed on recycled paper

T R AN S I T I O N is a publication of the W orldBank, in collab oration with the W illia mDavidson Institu te, and is produced bythe Development R esearch Group. Theopinions expressed are those of the au-thors and shou ld not be attrib u ted inany manner to the W orld Bank, to itsBoard of Execu tive Directors, or to thecou ntries they represent.

T R AN S I T I O N is pu b lished six tim es percalendar year, in Febru a r y, April, Ju ne,Au gu st, O ctober, and Decem ber.

© 1999 The International Bank forR econstruction and Development/TheW orld Bank

All rights reserved, M anufactu red inthe U nited States of America

Volu me 10, N u m ber 4, Au gu st 1999

For Distribution Use Only

BOFIT

Date post:	16-Mar-2018
Category:	Documents
Upload:	hangoc
View:	216 times
Download:	4 times

TRANSITIO THE …siteresources.worldbank.org/INTTRANSITION/Newsletters/...TRANSITIO THE NEWSLETTER...

Documents