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Abstract:
This paper, a presentation to the Vietnamese authorities in Hanoi in October 2001 at the "International Conference on Corporate Governance Development in Vietnam", compares the history of enterprise policy reforms in Russia and China. While Russia's privatization program was more rapid than that of other EE/CEE/CIS countries, China has embarked on a slower path of corporatization in the context of a "socialist market economy". Russia's mass privatization program (MPP) created over 41 million private Russian shareholders via direct shareholdings in individual firms or in voucher investment funds, and 70% of the 76,000 privatizations under the MPP were sales of majority shares mostly to workers and other "insiders" (MEBOs). Mass privatization was conducted quickly despite nascent institutional reforms-in corporate governance, competition policy, accounting, and capital markets-to "lock in" transition to a private enterprise-based economy. But the subsequent loans-for-shares program, in which the government gave controlling shares in the largest/most attractive firms as collateral to financial industrial groups (FIGs) in exchange for loans to budget, lacked transparency and raised serious concerns about equity, concentration of market power, and weak corporate governance incentives. Today, perhaps the key policy issue confronting the Russian authorities is the weak extent of inter-enterprise competition: many incumbent firms exercise market power based on vertical and horizontal structural dominance and new business start-ups face significant economic and policy barriers to entry. In China, the SOE sector has been the Achilles heel of the country's otherwise remarkable economic performance over past two decades. Since 1978, innovative, if often administrative, institutional reforms have begun to achieve Chinese goal of "separating government from businesses." Privatization and corporatization of SOEs is occurring, mostly involving small and medium sized firms. Decentralization has engendered discretion to localities. But the Chinese State still maintains ownership/control of key enterprises. Under the "socialist market economy" government agencies attempt to carry out shareholder functions typically performed by private owners in a market economy. For largest businesses, creation of holding groups the main form of restructuring. There is real progress in some areas, but portions of the strategy are contradictory, producing unanticipated distortions and resource drains, spilling over to financial and social sectors, jeopardizing core elements of the overall economic reform program. The paper concludes by drawing several key lessons from the Russian and Chinese experiences, designed to facilitate progress in Vietnam's own program of "equitization".

Abstract:
Progress in reforming China's state owned enterprises (SOEs) has been a litmus test for assessing the Chinese leadership?s willingness to seek membership in the World Trade Organization (WTO). The more extensive the reform of the SOEs, the more resilient they would become to the rigors of the international marketplace and less strain would be placed on China?s economy. By the same token, China's accession to the WTO will spur SOE reform, since the greater external competitive pressure will induce enterprise restructuring. The November 1999 agreement between Chinese and U.S. authorities on terms for China?s WTO accession signals an important commitment by the Chinese to expose their SOEs to more fundamental market discipline and reform. However, even after China becomes a member of the WTO, the effectiveness of its implementation of WTO commitments will turn on continued reform of the SOE sector. This paper sheds light on these challenges by analyzing the incentives and constraints on China's SOE reform program. Four critical aspects of the reforms are highlighted and evaluated against the backdrop of international experience: clarification of property rights; establishment of large group/holding companies and other new organizational structures; improved corporate governance incentives; and implementation of international financial accounting and auditing practices. The paper concludes with policy recommendations.

Abstract:
All countries - developing and developed alike - find it difficult to stay competitive without inflows of foreign direct investment (FDI). FDI brings to host countries not only capital, productive facilities, and technology transfers, but also employment, new job skills and management expertise. These ingredients are particularly important in the case of Russia today, where the pressure for firms to compete with each other remains low. With blunted incentives to become efficient, due to inter-regional barriers to trade, weak exercise of creditor rights and administrative barriers to new entrants - including foreign invested firms - Russian enterprises are still in the early stages of restructuring. This paper argues that the policy regime governing FDI in the Russian Federation is still characterized by "old" paradigm of FDI, established before the Second World War and seen all over the world during the 1950s and 1960s. Indeed, Russia is host to relatively little "new" paradigm FDI-investments characterized by state-of-the-art technology and world-class competitive production linked to dynamic global (or regional) markets. The paper suggests specific policy recommendations: (i) amend the newly enacted FDI law so as to give "national treatment" for both right of establishment and for post-establishment operations; abolish conditions that are inconsistent with the agreement on trade-related investment measures (TRIMs) of the WTO (such as local content restrictions); and make investor-State dispute resolution mechanisms more efficient, including giving foreign investors the opportunity to seek neutral, binding international arbitration; (ii) strengthen enforcement of property rights to improve corporate governance incentives; (iii) simplify foreign investor registration procedures and make them rules-based and transparent; and (iv) extend guarantee schemes covering basic non-commercial risks.

Abstract:
The State industrial sector is the Achilles heel of China's otherwise remarkable economic performance over the past two decades. Most other countries in transition from socialism have
transformed SOEs into commercial entities through systematic, market-driven restructuring and privatization to become more efficient and competitive. In China, a series of innovative, if often administrative, institutional reforms since 1978 have begun to achieve the Chinese authorities' goal of "separating government from businesses." But the Chinese State still maintains ownership of key enterprises, and government agencies carry out shareholder functions typically performed by private owners in a market economy. Although privatization and restructuring of SOEs is occurring, it mostly pertains to small and medium sized firms. For the principal businesses, by contrast, the creation of large state enterprise groups and holding companies (and experiments in other forms of "state asset management") have become the main form of restructuring. Today, China's SOEs still account for more than one-quarter of national production, two-thirds of total assets, more than half of urban employment and almost three-quarters of investment. While direct budgetary subsidies have declined, explicit and implicit subsidies are still making their way to prop up loss-making SOEs through the financial system and other routes. At the same time, SOEs are still producing non-marketable products, resulting in a sizeable inventory overhang. These inefficiencies and distortions represent a drain on the country's resources and thus present a challenge to the Chinese leadership for reform. This paper sheds light on these challenges by analyzing the incentives and constraints on China's SOE reform program. Four critical aspects of the reforms are highlighted and evaluated against the backdrop of international experience: clarification of property rights; establishment of large group/holding companies and other new organizational structures; improved corporate governance incentives; and implementation of international financial accounting and auditing practices. The paper concludes with policy recommendations.

Abstract:
Economists in the field of industrial organization, antitrust, and regulation have long recognized certain factors as potent determinants of opportunistic behavior, corruption, and "capture" of government officials. Only now are these relationships becoming conventional wisdom among specialists in economies in transition.

Ten years into the transition, corruption is so pervasive that it could jeopardize the best-intentioned reform efforts. Broadman and Recanatini present an analytical framework for examining the role market institutions play in rent-seeking and illicit behavior. Using recently available data on the incidence of corruption and on institutional development, they provide preliminary evidence on the link between the development of market institutions and incentives for corruption.

Virtually all of the indicators they examine appear to be important, but three are statistically significant:

· The intensity of barriers to the entry of new business.

· The effectiveness of the legal system.

· The efficacy and competitiveness of services provided by infrastructure monopolies.

The main lesson emerging from their analysis: a well established system of market institutions - clear and transparent rules, fully functioning checks and balances (including strong enforcement mechanisms), and a robust competitive environment - reduces opportunities for rent-seeking and hence incentives for corruption.

Both the design and effective implementation of such measures are important if a market system is to be effective. It is not enough, for example, to enact first-rate laws if they are not enforced.

The local political economy greatly affects whether a given policy reform will curtail corruption. Especially important are the following factors in the political economy:

· The credibility of the government's commitment to carrying out announced reforms.

· The degree to which government officials are captured by the entities they regulate or oversee.

· The stability of the government itself.

· The political power of entrenched vested interests.

Economists in the field of industrial organization, antitrust, and regulation have long recognized these factors as potent determinants of opportunistic behavior, corruption, and "capture" of government officials. Only now are they becoming conventional wisdom among specialists in economies in transition.

This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region - is part of a larger effort in the region to analyze the determinants of corruption and develop remedies. The authors may be contacted at hbroadman@worldbank.org or frecanatini@worldbank.org.

Abstract:
Not only does Russia have a poor record of attracting foreign direct investment (FDI) since the advent of reform in the early 1990s, but well over half of the investment it does attract goes to four regions in the western part of the country. Overcoming this skewed distribution of FDI - undoubtedly a factor in the country's uneven regional economic development - is essential for furthering Russia's growth and transition to a market economy. Factors associated with market size, infrastructure development, and the policy environment seem to explain much of the observed variation in FDI flows to regions in Russia.

Since its transition to a market economy began, Russia has not attracted much foreign direct investment (FDI). Inflows of FDI into Russia are much lower than those into other transition countries in the region, adjusted for population size and similar measures. Clearly, if Russia is to grow it must increase the level of FDI inflows, which is why a good deal of policy attention has focused on the problem.

Equally important for achieving sustainable growth in such a large, heterogeneous economy is learning how to make the spatial distribution of FDI within Russia more even. Inflows are strikingly skewed. Close to 60 percent of FDI goes to four regions in the western part of the country - Moscow City, Moscow oblast, St. Petersburg, and Leningrad oblast - which account for only 22 percent of Russia's gross national product and only 13 percent of Russia's population. Only two of the other 85 regions account for more than 2.5 percent of the country's FDI and most account for much less.

Surprisingly, neither policymakers nor observers and analysts have paid much attention to diagnosing the reason for this imbalance in FDI's distribution. Broadman and Recanatini try to empirically unbundle the determinants of FDI's regional distribution within Russia. They find that factors associated with market size, infrastructure development, and the policy environment seem to explain much of the observed variation in FDI flows to regions in Russia.

Moreover, the explanatory power of the model that best explains cross-regional variation in FDI flows from 1995 to 1998 changes significantly after the 1998 default and ruble devaluation - suggesting the possibility of a "structural change" in the determinants of FDI after the 1998 crisis.

This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region - is part of a larger effort in the region to study structural reforms in the Russian Federation. The authors may be contacted at hbroadman@worldbank.org or frecanatini@worldbank.org.

Abstract:
Like many Central Asian republics, Uzbekistan has adopted a gradual, cautious approach in its transition to a market economy. It has had some success attaining macroeconomic stability, but microeconomic reforms have lagged behind. It is time to accelerate structural reform.

In Uzbekistan state enterprises are being changed into shareholding companies, and private enterprises account for 45 percent of all registered firms. But business decisions to set prices, output, and investment are often not market-based, nor wholly within the purview of businesses, especially those in commercial manufacturing and services.

Lines of authority for corporate governance - from state enterprises to private enterprises - are ill-defined, so there is little discipline on corporate performance and little separation between government and business.

Nascent frameworks have been created for competition policy (for firms in the commercial sector) and regulatory policy (governing utilities in the infrastructure monopoly sector). But implementation and enforcement have been hampered by old-style instruments (such as price controls) rooted in central planning, by lack of a strong independent regulatory rule-making authority, by the limited understanding of the basic concepts of competition and regulatory reform, and by weak institutional capabilities for analyzing market structure and business performance.

Based on fieldwork in Uzbekistan, Broadman recommends:
· Deepening senior policy officials' understanding of, and appreciation of the benefits from, enterprise competition and how it affects economic growth.
· Reforming competition policy institutions and legal frameworks in line with the country's goal of strengthening structural reforms and improving macroeconomic policy.
· Improving the ability of government and associated institutions to assess Uzbekistan's industrial market structure and the determinants of enterprise conduct and performance.
· Making the authority responsible for competition and regulatory policymaking into an independent agency - a
champion of competition - answerable directly to the prime minister.
· Strengthening incentives and institutions for corporate governance and bringing them in line with international practice.
· Subjecting infrastructure monopolies to systemic competitive restructuring and unbundling, where appropriate. For other utilities, depoliticize tariff setting and implementation of regulations; ensure that price, output, and investment decisions by service suppliers are procompetitive (creating a level playing field among users); and increase transparency and accountability to the public.

This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Regional Office - is part of a larger effort in the region to assess structural reform in Central Asia. The author may be contacted at hbroadman@worldbank.org.

Abstract:
Russia gets relatively little foreign direct investment and almost none of the newer, more efficient kind, involving state-of-the-art technology and world-class competitive production linked to dynamic global or regional markets. Why? And what should be done about it? Foreign direct investment brings host countries capital, productive facilities, and technology transfers as well as employment, new job skills, and management expertise. It is important to the Russian Federation, where incentives for competition are limited and incentives to becoming efficient are blunted by interregional barriers to trade, weak creditor rights, and administrative barriers to new entrants. Bergsman, Broadman, and Drebentsov argue that the old policy paradigm of foreign direct investment (established before World War II and prevalent in the 1950s and 1960s) still governs Russia. In this paradigm there are only two reasons for foreign direct investment: access to inputs for production and access to markets for outputs. Such kinds of foreign direct investment, although beneficial, are often based on generating exports that exploit cheap labor or natural resources or are aimed at penetrating protected local markets, not necessarily at world standards for price and quality.

They contend that Russia should phase out high tariffs and nontariff protection for the domestic market, most tax preferences for foreign investors (which don't increase foreign direct investment but do reduce fiscal revenues), and many restrictions on foreign direct investment. They recommend that Russia switch to a modern approach to foreign direct investment by:

- Amending the newly enacted foreign direct investment law so that it will grant nondiscriminatory national treatment to foreign investors for both right of establishment and post-establishment operations, abolish conditions (such as local content restrictions) inconsistent with the World Trade Organization agreement on trade-related investment measures (TRIMs), and make investor-state dispute resolution mechanisms more efficient (giving foreign investors the chance to seek neutral binding international arbitration, for example).

- Strengthening enforcement of property rights.

- Simplifying registration procedures for foreign investors, to make them transparent and rules-based.

- Extending guarantee schemes covering basic noncommercial risks.

This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Regional Office - is part of a larger effort in the region to assist the Russian authorities in preparing for accession to the World Trade Organization. The authors may be contacted at hbroadman@worldbank.org or vdrebentsov@worldbank.org.

Abstract:
This analysis, based on more than 70 company case studies across 13 Russian regions during the spring, summer and fall of 2000 and the summer of 2001, examines four key issues that Russian firms face in carrying out business transactions in Russia's regional markets: (i) the state of inter-enterprise competition; (ii) the regulatory regime governing the delivery of infrastructure services (with a focus on the telecom and Internet sector); (iii) the sources and use of corporate finance; and (iv) the efficacy of the court system in fostering the settlement of commercial disputes. The study formulates policy recommendations for each of the areas analyzed. In so doing it sheds light on salient inter-regional differences in existing policy frameworks and in the structure and nature of the country's enterprise sector, as well as on how regional governments and firms both respond to and shape these differences. The study also highlights the evolution of inter-regional policy and economic changes over time, assessing the extent to which, two years after the 1998 crisis, enterprise restructuring at the local level has been affected by the devaluation of the ruble.

Abstract:
A dynamic market - one that facilitates the creation of jobs in productive enterprises and the destruction of jobs in unproductive enterprises - is increasingly viewed as essential for countries making the transition from centrally planned to market systems. Russia's privatization initiatives have not adequately reduced the overmanning of firms that was typical under the socialist system and the reallocation of labor has been relatively limited. There has been only a modest decline in state enterprises' hiring rates, labor hoarding has been widespread, and the labor market has taken few and limited steps toward becoming more flexible and competitive.

Broadman and Recanatini explore the labor dynamics of Russian enterprise restructuring, empirically assessing how patterns of job creation and destruction are related to various aspects of enterprise restructuring across firms in different sectors and regions, and to different forms, sizes, vintages, and performance characteristics of ownership.

Evidence from case studies - based on more than 50 site visits in 2000 - suggests that jobs have been destroyed, but only to a limited degree in some sectors and regions, largely because of institutional and incentive constraints and a still-widespread "socialist" corporate culture. Jobs have been created - particularly in sectors where devaluation had the most pronounced effect on import substitution and export promotion - but only slowly, mostly for lack of skilled workers and because regional mobility is limited. Labor turnover appears higher within regions than across regions.

Newly available data for 1996-1999 (provided by Goskomstat) for about 128,000 enterprises in 24 industrial sectors in Russia's 89 regions indicates that the typical firm has experienced only modest downsizing - about 12 percent - in number of employees. Smaller firms have entered, and larger, mature businesses have exited some sectors. Except for a lull in 1998, the rate of job creation has steadily increased and the rate of job destruction has declined, dropping substantially in 1998-1999. "Voluntary" worker separations remain the main - and growing - form of layoff, and the proportion of layoffs through redundancies is shrinking (now about 4 percent of total separations).

Firm size and net employment growth are not statistically related, but form of ownership seems to matter. Firm size is also statistically correlated (positively) with profitability, but restructuring through changes in net employment growth appears not to be. It seems Russian restructuring needs to become more efficient.

This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region - is part of a larger effort in the region to study structural reforms in the Russian Federation. The authors may be contacted at hbroadman@worldbank.org or frecanatini@worldbank.org.

Abstract:
While many industrial firms in Russia have undergone ownership change, relatively few have competitively restructured. This paper, using survey and other data, suggests much of Russian industry is immune from robust competition due to seller/buyer concentration in select markets, a high degree of vertical integration, and geographic segmentation. Regulatory constraints protect incumbent firms from entrants, both domestic and foreign. The absence of new businesses is striking. Restructuring anti-competitive structures and reducing barriers to entry should be key items in Russia's post-privatization program, and the paper sketches out a reform agenda. The nascent rules-based framework for competition policy should be strengthened to reduce discretion, increase transparency and enhance accountability.

Abstract:
The absence of new business in Russia is striking. Reforms to make Russia more competitive should start with eliminating regulatory and institutional barriers to the entry of new competitors.

Many industrial firms in Russia have undergone changes in ownership, but relatively few have been competitively restructured. Using survey and other data, Broadman suggests that much of Russian industry is immune from robust competition because of heavy vertical integration, geographic segmentation, and the concentration of buyers and sellers in selected markets.

Moreover, regulatory constraints protect incumbent firms from competition with new entrants, both domestic and foreign.
Broadman sketches a reform agenda for Russia's post-privatization program, which emphasizes the restructuring of anticompetitive structures and the reduction of barriers to entry. Broadman's proposed reform agenda calls broadly for strengthening Russia's nascent rules-based framework for competition policy to reduce discretion, increase transparency, and improve accountability.

This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Regional Office - is part of a larger effort in the region to assess structural reform in Russia. The author may be contacted at hbroadman@worldbank.org.

Abstract:
The authors examine the impact of trade facilitation on bilateral trade flows. They examine trade facilitation and capacity-building priorities in 12 countries in the Europe and Central Asia region - eight of the current members of the European Union: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia, and three candidate members: Bulgaria, Romania, and Turkey. The results suggest that behind-the-border factors play an important role in determining bilateral trade flows (controlling for the effects of tariffs, development levels, distance, and regional characteristics of exporters and importers, among other factors). The development of new data sets to expand work related to trade facilitation, including strengthening the empirical work explored here, is a key priority without which intelligent policy and priorities cannot be made. The authors' analysis is based on data from the World Economic Forum, Global Competitiveness Report 2001-2002, World Competitiveness Yearbook 2000, and Kaufmann, Kraay, and Zoido-Lobaton (2002). The results indicate that more gains in exports than in imports are expected should the values of three out of the four indicators (port efficiency, regulatory regimes, and information technology infrastructure) of the new and candidate member countries improve halfway to the EU15 average. These countries would expect large trade gains as well as improvements in trade balances as their integration into the EU continues. For example, the greatest absolute trade gains - $49 billion and $62 billion respectively - could be expected if their port efficiency and information technology infrastructure reach half the average level of the EU, and 70 percent of trade gains are associated with export expansion.

Economic Theory & Research, Trade and Regional Integration, Trade Policy, Transport and Trade Logistics, Common Carriers Industry

Abstract:
Corruption is now recognized to be a pervasive phenomenon that can seriously jeopardize the best-intentioned reform efforts. Economists in the field of industrial organization, antitrust and regulation have long recognized certain institutional factors as potent determinants of corruption, opportunistic behavior and "capture" of government officials. Only now are these relationships becoming conventional wisdom among specialists of economies in transition. This paper presents an analytical framework for examining the role basic market institutions play in rent-seeking and illicit behavior. Using data only recently available on the incidence of corruption and institutional development across an array of transition economies, the paper provides preliminary evidence on the link between the development of market institutions and incentives for corruption. The empirical results suggest that high barriers to new business entry and soft budget constraints on incumbent firms are particularly important institutional factors engendering opportunities for corruption. The findings also support the notion that economic development and maturation of democratic processes both temper corruption, as does, to a lesser extent, openness to international trade.