Milestones of Transition

Croatia's economy has achieved a high degree of economic liberalization compared with Europe's other transition economies, senior World Bank researcher Martha de Melo told an international conference in Dubrovnik. She is co-author (with Cevdet Denizer and Alan Gelb) of the Bank's forthcoming study "From Plan to Market: The Patterns of Transition," which appraises countries based on a liberalization index (covering prices, trade, exchange rates, privatization, and reflecting the duration as well as the intensity of reforms), comparable to such indicators as growth and inflation. According to this index, Croatia ranks high on the list, in part because of early reform measures introduced before the split of the former Yugoslav Republic.

Capital flight from Russia amounted to some $80 billion by the end of 1994, according to the head of the Russian bureau of Interpol Y. Melnikov, who said capital continued to leave the country at $1.5 billion per month in 1995.

Russia's first-half GDP fell 6 percent from a year earlier, compared with a 15-percent drop for all of last year. Russia's GDP stood at 606 trillion rubles ($134.6 billion) in the first half of 1995, while industrial output—at 420 trillion rubles ($93.3 billion)—dropped 3 percent over the same period, according to Prime Minister Viktor Chernomyrdin, who quoted these figures in his address to the Duma on July 19. The economy is now shrinking at the lowest rate since the Soviet breakup. In June the GDP rose 3 percent over the previous month. But the inflation rate, expected to slow to 5.0 or 5.5 percent in July, did not approach the average monthly rate of 1 percent envisioned by the IMF in April for in the second half of this year. Despite unexpectedly high inflation, since early May, the ruble has gained back 12.5 percent of its value against the dollar, trading well within the band that the Central Bank promised to defend through October.

Russia's draft 1996 budget envisages revenues of 355 trillion rubles ($79 billion), expenditures of 440 trillion rubles ($98 billion), a budget deficit equal to 4 percent of GDP, and inflation of no more than 2 percent a month, Finance Minister Vladimir Panskov announced in early July. Spending on health, education, and other social spheres will increase. More money is being allocated to convert the military-industrial complex and to high-technology projects. The deficit, moreover, is to be covered from noninflationary sources, with an emphasis on domestic rather than foreign borrowing. In recent months the government has reduced its wage debt to 100-200 billion rubles and had sent 306 billion rubles to the regions to ease social tensions, Panskov added.

Russia will not import grain this year despite one of the worst droughts in 20 years, Deputy Prime Minister Aleksandr Zaveryukha said on July 25, citing good prospects for the grain harvest in Siberia. But since spring sowing in Siberia was delayed this year, late ripening could mean problems in the event of early snow.

The Russian Federation Council fixed the subsistence minimum for 1996 at 218,000 rubles ($48) per month. This figure is the basis for determining minimum salaries, pensions, scholarships, and eligibility for social support. The subsistence minimum will be quarterly indexed to the inflation rate. On July 19 the lower house of parliament raised both the minimum wage and minimum pension to 55,000 rubles ($12) a month, as of August 1. The minimum monthly wage currently stands at 43,000 rubles ($10) and the average monthly wage at 495,000 rubles ($109).

Russia extracted 2.5 percent less gas and oil in the first half of 1995 than it had during the same period in 1994, Russian radio reported July 19. The only bright spot in this picture was firms that received Western investment, whose production increased during the same period.

Russia plans to raise its value-added tax (VAT) rate from 20 percent to 21 percent beginning in January 1996, Finance Minister Vladimir Panskov announced on July 21. Russia's 1995 budget foresees 50 trillion rubles in VAT revenues out of a total anticipated tax revenue of 128 trillion rubles.

In Russia more than 14,000 individuals and firms evade taxes entirely. This evasion costs the government some 7.3 trillion rubles, said the head of the Federal Tax Police, Sergei Almazov, on July 20. The tax police have been able to do little to combat this rising tide of evasion because the government gave it only 23.6 percent of the money it needed. Almazov also lashed out at the Duma for passing a law that gives tax evaders the same punishments as it accords to those who engage in illegal hunting or cruel treatment of animals.

The Russian government approved a list of strategic companies to be held back from privatization this year, paving the way for the sale of 6,000 other companies beginning in August. The government, which earned 104 billion rubles from privatization in the first half of this year, is timing the sales to coincide with an expected investment boom in early autumn.

Poland took a step forward in its mass privatization plan by beginning to allocate leading (33 percent) shares in 413 participating state enterprises (worth $3 billion) by lottery to 15 national investment funds run by joint domestic-foreign management firms. On July 18 fund managers completed the selection process ahead of schedule. Tradable certificates, entitling the bearers to one share in each fund, are expected to go on sale to 28 million eligible Poles in mid-November. The sale price will equal 5 percent of the average wage. More than 4,400 enterprises, with a book value of $35 billion, still remain in the public sector.

Polish Finance Minister Grzegorz Kolodko said he is determined to bring down inflation to 20 percent by the end of 1995 but warned that success would come at the price of a slowdown in exports and growth later in the year. Planned measures include liberalization of some food imports, more intervention in the food market, tighter wage and price controls, and stricter budgetary discipline to allow the zloty to rise. Consumer prices rose by 1 percent in June, the lowest monthly rate since August 1991. Industrial production was up 11.7 percent over June 1994.

How is Poland doing in comparison to other Eastern European countries? The report of the Polish Central Planning Office issued on July 6 says that Polish and Slovenian 1994 growth rates, at 5 percent, were the highest in the region. Poland and Estonia are expected to take first place in 1995, with grwoth rates of 6 percent. Polish exports rose 22 percent in 1994, but Slovakia, Hungary, and Romania registered even greater growth. Inflation in Poland in 1994 was 32.2 percent compared with 10.2 percent in the Czech Republic and 320 percent in Russia. With regard to unemployment, Poland placed seventh in Europe as a whole (with Macedonia, the rump Yugoslavia, and Spain topping the list). Poland was the only country in the region whose foreign debt decreased, despite being the second largest in the region in relation to GNP (42 percent), second only to Hungary's (72 percent). Poland's budget deficit amounted to 2.7 percent of GNP in 1994 compared with 10.4 percent in Hungary and 9.3 percent in Russia.

According to the Overseas Private Investment Corporation, U.S. investment in Poland tops $1 billion, making the United States the largest investor in Poland.

In a public opinion poll conducted in Poland in June by the Center of Public Opinion Research (OBOP), a majority of respondents (53 percent) were for legalizing abortion if the woman was in difficult conditions. Women do not generally differ in their opinions from men. The oldest and youngest Poles are least inclined to support the legalization of abortion, Rzeczpospolita reported on July 17.

The Czech Statistical Office (CSU) predicted that GDP would grow by about 4 percent in 1995 and between 4.4 and 5.2 percent in 1996. Unemployment should rise to 3.8 percent in 1995 and to 4 to 4.8 percent in 1996. The rate of inflation is expected to drop from the present 10 percent to 9.5 percent in 1995, and to 8.5 to 9 percent in 1996. Nominal wages will grow by about 16 percent a year, so that the annual growth of real wages will grow 6 to 7 percent. It is expected that the increase in household incomes will push private consumption up by 6.6 percent in 1995, and by 7.2 to 7.8 percent in 1996.

In June the Czech trade deficit widened further, with a monthly 9.2 billion koruna ($354 million) deficit taking the first-half deficit to 46.9 billion ($1.8 billion). The data for June show no sign that the trade balance will begin to improve in the near term, government officials predict. Export growth from January to June was only 6.4 percent as against import growth of 32.4 percent.

Czech wage regulations were lifted on July 12. Wages have been controled since July 1993 for firms with more than 25 employees, with rises pegged to inflation and company performance. In another development the Czech parliament passed a law to raise the pension age gradually over the next 12 years. The pension age for men will be raised from 60 to 62 by the year 2007, while women—who were allowed to retire between age 53 and 57, depending on how many children they have—will now be pensioned off no earlier than age 57 to 61.

On June 29 Czech lawmakers voted to reduce taxes further than the government had requested. From next year, therefore, the highest rate of income tax will fall from 43 percent to 40 percent (for people earning more than 564,000 koruny annually). The threshold for paying tax was raised by 2,400 koruny to 26,400 koruny annually, and the bands for lower income tax rates were widened. Company tax was reduced from 41 percent to 39 percent. Only taxes on cigarettes, nonleaded petrol, and sparkling wine went up. Finance Minister Ivan Kocarnik said the tax reduction would take 22.5 billion koruny out of the state budget.

On July 7 the Czech government approved a deal for three international oil companies—Shell, Agip, and Conoco—to take a 49 percent interest in the two biggest Czech refineries. These companies will pay a total of $173 million outright, and investment over the next five years is estimated to total up to $500 million.

Czech Economics Minister Karel Dyba announced that the state would sell a 27 percent stake in SPT Telecom, the telecommunications monopoly, to Swiss Telecom and PTT Netherlands for 1.32 billion dollars. Although holding a minority stake, the Western firms will take three of the five seats on the company's management board, giving them day-to-day control of the company.

Foreign direct investment totaled $117.2 million in the first quarter of 1995, up 37 percent from the same period last year, the Czech National Bank reported. Germany accounted for 43.6 percent of the total 1995 first quarter inflows, followed by the United States (33 percent) and Austria (6.8 percent). Construction, banks, and insurance companies were the most attractive sectors. (FDI reached $862.4 million in 1994 and since 1989 has totaled $3.22 billion.)

Latvia has opened its first fully functioning stock exchange since 1940, when Soviet authorities closed the Riga bourse.

As of June 30 about 5,620 of Lithuania's 6,700 state-owned enterprises marked for privatization had been sold.

EU Agriculture Commissioner Franz Fischler warned that the eastward enlargement of the European Union would disrupt the Common Agricultural Policy. Enlargement will therefore have to be outside the CAP altogether, involve a separate CAP for the new entrants, or be phased in over a long transition period, the Commissioner stated. His comments followed the release of the EU Commission's reports, which paint a bleak picture of agriculture in 10 central and Eastern European countries. The recent crisis in agriculture in these countries has resulted in a steep fall in production, consumption, and exports. All Central and Eastern European countries, with the exception of Hungary, are net importers of agricultural products from the EU.

In May Hungary's industrial production rose 13.4 percent over that of April and was 15.1 percent higher than in May 1994. Industrial production was 9.7 percent higher in the first five months of this year than at the end of 1994. Hungary's trade deficit stood at $2.3 billion at the end of June, with exports reaching $5.3 billion in the first six months and imports $7.6 billion. Hungary's stalled privatization program appears poised for recovery. Western investors are back, and Hungary's efforts to allay fears that it risked becoming the Mexico of Eastern Europe seem to be paying off, according to the International Herald Tribune in a July 22-23 article.

Hungary's recently approved privatization program foresees the sale of Hungarian Electricity (MVM), Hungarian Oil (MOL) regional gas suppliers, and Antenna Hungaria. At the sale of MOL, a share package of 50 percent plus one vote would be offered for potential buyers. But to prevent rival foreign oil producers from gaining majority stakes, only bids by financial investors would be accepted. MOL would remain a national oil company, but with the state's shareholding cut to 25 percent of the shares plus one vote. Most shares of Hungarian Electricity could be privatized. In the first stage 48 percent of MVM's shares would be put up for sale, and potential investors would have an option to obtain further ownership before December 31, 1997. Power stations, which would be fully privatized, including the shares owned by local authorities, would be sold in share packages of 33 to 38 percent equity in the first stage of their privatization. Local authorities would be able to buy up to 25 percent of power station shares and 40 percent of gas supply company shares. The forthcoming energy price increase will be unaffected by privatization. Electricity and gas fees are scheduled to go up by 8 percent in September 1995, by another 25 in March 1996, and by 18 percent in October 1996.

The rump Yugoslav currency, the so-called "super dinar" is currently trading at 2.3 to 2.5 to the German mark, reported the Belgrade daily Nasa Borba. When introduced in January 1994, the new dinar was pegged to the value of the mark at an exchange of 1:1. Central bank governor (and former World Bank official) Dragoslav Avramovic acknowledges that three years of trade sanctions have flattened the economy but says that the situation has stabilized, and rapid recovery is expected once the embargo ends. Avramovic, who masterminded the program and created the super dinar that rescued the country from hyperinflation, says that the budget must be kept balanced to prevent a return of inflation.

Chinese inflation fell to 18.5 percent in the first half of this year, down from 20 percent last year. Economic growth was 10 percent in the first half, showing the signs of a slow-down. But Chinese economists warn that the strong yuan threatens to turn China's 1994 $5 billion trade surplus into a deficit this year.

China's State Planning Commission Chief Chen Jinhau said that the ninth Five-Year Plan, due to start in 1996, will focus on making industry more efficient and on improving industry's technical capabilities. Privatization of state-owned enterprises is not the first goal. "We need more efficiency, quality, and technical progress. That will be our focus," said Chen.

Beijing's slow revenue collection and rising state wage bill continued to create a budget deficit of 9.1 billion yuan in the first five months of 1995. Ma Jiantang, senior official of the Development and Research Centre, called the deficit alarming. Usually, there are surpluses in the first half of the year.

The Slovak parliament eliminated the mass voucher privatization scheme and approved a new privatization law. Under the new plan the 3.5 million Slovak citizens who have already signed up for voucher privatization will each receive government bonds (worth up to 10,000 koruny) with maturities of up to five or six years, backed by sales of property by the state. Prime Minister Vladimir Meciar, stated on Slovak Television that the government would acquire golden shares in strategically important state enterprises such as power, gas, weapons, and chemical facilities.

Slovakia's industrial production grew at an annual rate of 7.6 percent in March, a 1.2 percent increase over the rate for 1994, according to the Statistical Office. Unemployment fell to 14.6 percent, down from 15.2 percent in January. Hard currency reserves at the National Bank reached $2 billion, up from $1.7 billion at the end of 1994. The Slovak currency strengthened to 29.4 koruny to the dollar in March, an improvement over the rate of 32 koruny in 1994. Annual inflation fell from 11.7 percent in 1994 to 11.3 percent. Slovakia's GDP grew at an annual rate of 4.8 percent in 1994, a substantial gain over the negative 4.1 percent rate of the previous year.

Uzbek officials and the director of Japan's Mitsubishi, Sinroku Morohase, held talks on the construction of a natural gas pipeline to run through Turkmenistan, Uzbekistan, China, the Korean Peninsula, and Japan. Construction is expected to begin in 2000. The total estimated cost of the project—which would initially move 18 billion cubic meters of gas per year—is $9.5 billion. In other developments Uzbekistan lifted all restrictions on the purchase of foreign currency from commercial banks as of July 1.

On July 3 Ukraine's Leonid Kuchma appointed a new government. As he explained it, the change represented a shift away from strict monetarism toward deep industry restructuring. But the course of economic reform will stay on track. Kuchma also reduced the number of deputy prime ministers from nine to five.

Ukrainian lawmakers approved the main principles of the 1996 budget with the aim of stabilizing the economy and reducing inflation. The package envisages a budget deficit of 6 percent of GDP, lower subsidies, cuts in defense spending, the abolition of preferential tariffs, and the imposition of new license fees for manufacturing alcoholic and tobacco products. They also adopted a new law on education that continues to guarantee free state-secondary education but no longer provides for free universal higher education.

Leonid Kuchma announced that Ukraine's new currency, the hryvna, will be introduced perhaps as early as September. The precise date will be determined once Ukraine establishes a $1.5 billion stabilization fund to back the currency. He also said the fact that the karbovanets has stabilized at around 150,000 karbovantsi to the dollar may allow Ukraine to proceed with monetary reform. The monthly inflation rate dropped to 4.6 percent in May. Since reaching a high of 21.2 percent in January, inflation has fallen steadily throughout this year.

The European Union will release a $130 million grant, plus a further $520 million from Euratom, to co-fund the closure of the Chernobil nuclear plant. Western estimates put the cost of decommissioning the damaged plant at $1.7 billion and of building the new plant at a further $2 billion. The G-7 countries offered Ukraine $400 to 500 million in grants and $1.5 billion in loans for the project. Ukraine calculates the final cost of the shutdown at $4 billion. The timetable calls for Unit No. 1 to be shut down in 1997 and Unit No. 3 by the end of 1999. But Ukrainian officials say this deadline can be met only with substantial Western assistance.

Viet Nam's economic growth, in recent years averaging about 8 percent annually, will rise to 9 percent this year and 9.5 percent next year, making it Asia's growth leader.

From July 17 the Bulgarian National Bank cut its prime interest rate by five points to 39 percent, down from 72 percent at the beginning of 1995. The rate might fall to 27 to 30 percent by the end of the year, National Bank Governor Todor Valchev said. The rate was reduced because inflation is relatively low. In June it was 0.5 percent, the lowest since the beginning of economic reform in 1991. Inflation for the first half of 1995 totaled 15.2 percent, as opposed to 59.4 percent in the first half of 1994. Inflation has dropped along with the sharp drop in the population's buying power and the imposition of restrictive policies. The National Statistical Institute expects inflation to fall to about 40 percent in 1995, down from 121.9 percent the previous year.

In mid-July Algeria adopted a privatization law allowing the government to sell off to the private sector state-owned small and medium-size companies in agriculture, commerce, transport, services, and tourism but not in oil, gas, and other strategic industries. Algerian economists say the absence of a stock market and a modern banking system in Algeria will slow any privatization program. Political unrest and a lack of finance has meant that the economy has been working at only 50 percent of capacity. More than 1.5 million (mostly young) Algerians are unemployed (see also page 24).