UNUnited Nations Economic Commission for Europe

ECONOMIC ANALYSIS

CONTENTS

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Explanatory notes......................................viii

Abbreviations......................................ix

Preface......................................xi

Part One

CURRENT ECONOMIC DEVELOPMENTS
Chapter 1 THE ECE ECONOMIES AT MID-1998 ......................................3
1.1  The global context and the situation in the western market economies ......................................3
(i)      Diverging performance and increasing instability ......................................3
(ii)     Economic crisis in East Asia ......................................4
(iii)     The economic situation in western Europe and North America ......................................6
(iv)     The short-term outlook ......................................9
1.2     The transition economies ......................................11
(i)     The economic pattern in the first half of 1998 ......................................11
(ii)     Financial distress in Russia ......................................22

Part Two

ENTERPRISE AND BANK RESTRUCTURING IN THE TRANSITION ECONOMIES

Papers from the ECE Spring Seminar, 1998
Introduction by the Economic Analysis Division, UN/ECE ......................................29
Chapter 2     ENTERPRISE AND BANK RESTRUCTURING IN THE TRANSITION ECONOMIES
Robert I. Mochrie, Mark E. Schaffer and Alan A. Bevan ......................................33
2.1     The nature of market orientation ......................................33
(i)     Enterprise structure ......................................33
(ii)     Bank structure ......................................34
2.2     The starting point and the nature of transition ......................................35
2.3     Restructuring in the enterprise sector ......................................37
(i)     Adjustment by state owned firms ......................................37
(ii)     Enterprise performance and ownership ......................................40
2.4     The banking sector in transition ......................................42
2.5     Bankruptcy, creditor passivity and enterprise restructuring programmes ......................................45
(i)     The role of bankruptcy in market economies ......................................45
(ii)     Bankruptcy, creditor passivity and soft budget constraints in transition economies ......................................47
(iii)     Alternatives to bankruptcy ......................................48
2.6     Managing the transition in the banking sector ......................................52
(i)     Stock problems: the role of government ......................................54
(ii)     Privatization as a policy objective ......................................54
2.7     Current issues ......................................56
(i)     Banks as agents of enterprise restructuring ......................................56
(ii)     Banks as owners ......................................57
(iii)     Entry ab initio ......................................58
(iv)     Foreign institutions ......................................60
Discussion of chapter 2 by Marek Belka and Eugen Jurzyca ......................................64
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Chapter 3     BANKING SECTOR REFORM IN THE TRANSITION ECONOMIES – A CENTRAL BANKING PERSPECTIVE
Elmar B. Koch ......................................67
3.1     The relevance of the topic ......................................67
3.2     Some major caveats ......................................68
(i)     Interdependence, comprehensiveness and complexity ......................................68
(ii)     Eastern Europe – a diverse group of countries ......................................68
(iii)     Sound banking – a vision emerging ......................................68
3.3     Growth and finance – the important link ......................................69
(i)     Introduction ......................................69
(ii)     Selected factors in stimulating growth ......................................69
3.4     Banking supervision – status and Core Principles – a must in avoiding crashes ......................................76
3.5     The supportive role of foreign banks ......................................76
3.6     Non-bank financial intermediaries and conglomerates – high on the watch list ......................................77
3.7     Conclusion ......................................77
Annex to chapter 3: Illustrative list of indicators of robust financial systems ......................................79
Discussion of chapter 3 by David M. Kemme and István P. Székely ......................................82
Chapter 4     ENTERPRISE AND BANK RESTRUCTURING IN RUSSIA
Evgeny Gavrilenkov ......................................87
4.1     Introduction ......................................87
4.2     Macroeconomic climate and microeconomic performance: current trends and selected problems ......................................88
4.3     Balance of payments and capital flight: how Russian money can be used abroad ......................................91
4.4     Russian firms: some aspects of firms’ behaviour ......................................94
4.5     The banking sector and its role as an intermediary between savings and investment: were there
any changes in 1997? ......................................95
Discussion of chapter 4 by Silvana Malle ......................................99
Chapter 5     A CASE STUDY: THE CZECH PRIVATIZATION AND SUBSEQUENT STRUCTURAL
CHANGES IN CAPITAL OWNERSHIP AND PROPERTY RIGHTS
Pavel Mertlík ......................................103
5.1     Introduction ......................................103
5.2     Investment funds ......................................104
(i)     Definitions ......................................104
(ii)     The first wave of the Large Privatization (1990-1992)......................................104
(iii)     The second wave of the Large Privatization (1993-1994) ......................................104
(iv)     Change in the regulation of IFs in 1996 ......................................105
(v)     Further institutional change in 1998 ......................................105
5.3     Capital concentration ......................................105
(i)     Major factors behind reconcentration ......................................105
(ii)     Subsequent changes in the structure of ownership ......................................106
(iii)     Results ......................................106
(iv)     Role of the banks ......................................107
Discussion of chapter 5 by Marie Lavigne ......................................110
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Chapter 6     ENTERPRISE RESTRUCTURING IN EAST GERMANY
6.1     Introduction ......................................111
6.2     The twofold policy strategy for enterprise restructuring: privatization and subsidization ......................................113
6.3     Enterprise restructuring: some considerations ......................................114
6.4     Database ......................................115
6.5     Enterprise restructuring: results on an aggregate level ......................................116
(i)     Sectoral specialization ......................................116
(ii)     Exports ......................................117
(iii)     Productivity and unit labour costs ......................................118
6.6     Enterprise restructuring: evidence from the DIW enterprise panel ......................................119
(i)     Ownership change ......................................119
(ii)     Overall performance of enterprises and obstacles ......................................120
(iii)     Capacity utilization, incoming orders and market access ......................................123
(iv)     Investment strategies ......................................124
(v)     Profit situation and inadequate equity capital ......................................125
6.7     Conclusions ......................................126
Discussion of chapter 6 by Michael Kaser ......................................129

Part Three

STATISTICAL APPENDIX
STATISTICAL APPENDIX ......................................133
Corrections to Economic Survey of Europe, 1998 No. 1 ......................................161

LIST OF TABLES
Table......................................     Page
 

1.1.1     Annual changes in real GDP in east Asian countries, 1996-1998 ......................................5

1.1.2     Quarterly changes in real GDP, 1997-1998 ......................................7

1.1.3     Real GDP in the ECE market economies, 1995-1998 ......................................10

1.2.1     Basic economic indicators for the ECE transition economies, 1995-1998 ......................................12

1.2.2     International trade and external balances of the ECE transition economies, 1995-1997 ......................................13

1.2.3     GDP and industrial output in the ECE transition economies, 1997-1998 ......................................14

1.2.4     Retail trade in the transition economies, 1996-1998 ......................................15

1.2.5     Consumer prices in the transition countries, 1996-1998 ......................................17

1.2.6     Total and industrial employment in the transition economies, 1995-1997 ......................................18

1.2.7     Registered unemployment in the transition economies, 1997-1998 ......................................19

1.2.8     Trade performance and external balances of the ECE transition economies, 1997-1998 ......................................20

1.2.9     CIS countries’ trade with CIS and non-CIS, 1997-1998 ......................................21

2.3.1     Change in total industrial employment in selected transition countries ......................................37

2.5.1     Survey of 50 Czech manufacturing firms in 1994 ......................................48

3.3.1     Banking supervision ......................................75

4.2.1     Real industrial output by sectors, 1990-1997 ......................................89

4.2.2     Allocation of loss-makers among large- and medium-scale enterprises by sectors, 1996-1997 ......................................89

4.2.3     Profits in Russian Federation enterprises by sectors, 1991-1997 ......................................90

4.3.1     The aggregated 1997 balance of payments: revised and prior revision ......................................91

4.3.2     Balance of payments of the Russian Federation, 1994-1997 ......................................92

4.3.3     Alternative estimates of the exports and imports of the Russian Federation, 1995-1997 ......................................92

4.3.4     Reconstructed balance of payments of the Russian Federation, 1994-1996 ......................................93

4.4.1     Top 10 Russian enterprises by sales, 1996 ......................................94

4.4.2     Top 10 Russian enterprises by profits, 1996 ......................................94

4.4.3     Top 10 Russian enterprises by market value, 1996 ......................................94

4.5.1     Selected indicators of Russian commercial banks, 1996-1997 ......................................97

4.5.2     Top 10 Russian commercial banks as at 1 January 1998 ......................................97

6.1.1     Indicators of the economic catching up in eastern Germany, 1991-1997 ......................................112

6.1.2     Structure of eastern German gross value added, 1990-1996 ......................................112

6.2.1     State of privatization in eastern Germany at the end of 1994 ......................................113

6.2.2     Selected economic support measures for eastern German companies, 1991-1996 ......................................114

6.5.1     Gross production in manufacturing, 1991 and 1996 ......................................118

6.5.2     Exports in manufacturing, 1991 and 1996 ......................................119

6.6.1     Eastern German manufacturing firms according to ownership status, 1991-1996 ......................................120

6.6.2     Eastern German manufacturing firms facing problems in the market, 1991-1996 ......................................120

6.6.3     Selected problems perceived by manufacturing firms in eastern Germany, 1991-1996 ......................................121

6.6.4     Manufacturing firms in east Germany facing problems in the market, 1995 and 1996 ......................................122

6.6.5     Selected problems for manufacturing firms in east Germany, 1995 and 1996 ......................................122

6.6.6     Capacity utilization and incoming orders in eastern German manufacturing firms, 1996 ......................................123

6.6.7     Distribution of turnover of eastern German manufacturing firms, 1996 ......................................124

6.6.8     Investment per employee in eastern German manufacturing industry, 1995-1996 ......................................125

6.6.9     Plans for investment and leasing of eastern German manufacturing firms for 1997 ......................................126

6.6.10     Profit situation perceived by east German manufacturing firms, 1995-1996 ......................................127

A.1     Real GDP in the ECE market economies, 1983-1997 ......................................135

A.2     Real private consumption expenditure in the ECE market economies, 1983-1997 ......................................136

A.3     Real general government consumption expenditure in the ECE market economies, 1983-1997 ......................................137

A.4     Real gross domestic fixed capital formation in the ECE market economies, 1983-1997 ......................................138

A.5     Real total domestic demand in the ECE market economies, 1983-1997 ......................................139

A.6     Real exports of goods and services in the ECE market economies, 1983-1997 ......................................140

A.7     Real imports of goods and services in the ECE market economies, 1983-1997 ......................................141

A.8     Industrial output in the ECE market economies, 1983-1997 ......................................142
Table......................................     Page

A.9     Total employment in the ECE market economies, 1983-1997 ......................................143

A.10     Standardized unemployment rates in the ECE market economies, 1983-1997 ......................................144

A.11     Consumer prices in the ECE market economies, 1983-1997 ......................................145

B.1     Real GDP/NMP in the transition countries, 1980, 1984-1997 ......................................146

B.2     Real total consumption expenditure in the transition countries, 1980, 1984-1997 ......................................147

B.3     Real gross fixed capital formation in the transition countries, 1980, 1984-1997 ......................................147

B.4     Real gross industrial output in the transition countries, 1980, 1984-1997 ......................................148

B.5     Total employment in the transition countries, 1980, 1984-1997 ......................................149

B.6     Registered unemployment in the transition countries, 1990, 1993-1997 ......................................150

B.7     Consumer prices in the transition countries, 1989-1997 ......................................151

B.8     Producer price indices in the transition countries, 1989-1997 ......................................152

B.9     Nominal gross wages in industry in the transition countries, 1990-1997 ......................................153

B.10     Merchandise exports of the transition countries, 1980, 1985-1997 ......................................154

B.11     Merchandise imports of the transition countries, 1980, 1985-1997 ......................................155

B.12     Balance of merchandise trade of the transition countries, 1980,1985-1997 ......................................156

B.13     Merchandise trade of the transition countries by direction, 1980, 1985-1997 ......................................157

B.14     Exchange rates of the transition countries, 1980, 1985-1997 ......................................158

B.15     Current account balances of the European transition countries, 1990-1997 ......................................159

B.16     Inflows of foreign direct investment in the transition countries, 1990-1997 ......................................160

LIST OF CHARTS
Chart......................................     Page
 

1.1.1     Average monthly nominal exchange rates against the dollar, January 1995-June 1998 ......................................4

1.1.2     World commodity prices, January 1995-May 1998 ......................................5

1.1.3     Quarterly changes in real GDP, 1996-1998 ......................................8

3.3.1     GDP growth and inflation in transition economies, 1991-1997 ......................................71

3.3.2     Financial indicators in eastern Europe, 1993-1998 ......................................73

4.2.1     Inflation and real growth rate of payables, 1993-1997 ......................................90

4.3.1     Quarterly capital outflows and increases in the stock of payables, 1994-1997 ......................................93

4.5.1     Interest rates in Russia, 1996-1998......................................96

6.5.1     Production and the volume of new orders in east German manufacturing industry, January 1991 to September 1997 ......................................117

LIST OF BOXES
Box......................................     Page
 

2.3.1     The Hungarian bankruptcy framework ......................................38

2.5.1     The Polish bank and enterprise restructuring programme ......................................50

2.5.2     Konsolidacni Banka – the Czech Consolidation Bank ......................................51

2.7.1     Bank failure in transition economies – a comparison of the Czech Republic, Latvia and Romania ......................................59