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Beyond TransitionThe Newsletter About Reforming Economies

April — June 2006 • Volume 17, No. 2 http://www.worldbank.org/transitionnewsletter

Theme of the Issue: Energy

Interview with Kenneth Rogoff: “No country should plan onUS$70 oil ... forever” 3

World Crude Oil Markets: Monetary Policy and the RecentOil ShockNoureddine Krichene 5

The Oil Supply Potential of the CISRudiger Ahrend and William Tompson 7

Insert: The Resource Curse and Media FreedomSergey Guriev, Konstantin Sonin and Georgy Egorov 8

Management of Energy Resources in ChinaJiang Kejun 9

Caspian Oil: Changing the World's Energy Outlook Yadviga Semikolenova 11

Interview with Vladimir Milov: “The state should leave theenergy sector” 12

Human Capital and the “Resource Curse” Natalia Volchkova and Elena Suslova 14

New Findings

Energy Poverty in Macedonia and the Czech RepublicStefan Buzar 15

The Productivity Effects of Services Liberalization in theCzech Republic Jens Arnold, Beata S. Javorcik and Aaditya Mattoo 17

The Media's Effect on Corporate Governance in RussiaAlexander Dyck, Natalya Volchkova and Luigi Zingales 19

Is there a "Glass Ceiling" in the Czech Republic?Stepan Jurajda and Teodora Paligorova 21

Foreign Ownership vs. Production EfficiencyValentin Zelenyuk 23

Russia and the WTO: The "Gravity" of Outsider StatusBogdan Lissovolik and Yaroslav Lissovolik 24

World Bank Agenda 25

New Books and Working Papers 27

Conference Diary 30

www.cefir.ru

Global Oil Demand Growth thousand barrels per day

Europe FSU

Middle East

North America

Latin America

Africa

Asia809

88 197

212�4 6 170 47 47

402 324 332

1279

414 470

275133 117

98 83 68

Source: IEA, www.iea.org/2004/2005/2006

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Beyond Transition • April — June 2006

2 ·

Dear Reader,

High and highly volatile oil prices over the last few years pose different problems for energyexporting and importing countries. On the face of it oil importers would seem to suffer more.Kenneth Rogoff, however, argues in his interview to BT that in fact oil exporters face much big-ger challenges than importers. Rogoff believes, and his view is supported by evidence presented inNoureddline Krichene's article, that the 1970s output decline was due to monetary policy ratherthan oil shocks. In the last 30 years, oil importing countries have strengthened their financial sys-tems, and improved monetary policy. As a result, they have good chances to withstand currentprice rises without big output losses. Moreover, the current price highs, like all the previous ones,will not last forever. According to Rogoff, we will see oil prices decline within the next five toseven years and this will certainly lead to economic turmoil in oil exporting countries, whosefinancial systems and macroeconomic policies are not strong enough to adapt to lower prices.

One way to make oil exporting countries less vulnerable, according to Rogoff, is to increase private sector participation in theoil sector. Instead we have been observing the increase of state control in oil and gas in many oil producing countries. The ener-gy-rich CIS countries, such as Russia and Kazakhstan, which had previously relied to a large extent on private or foreign own-ership, are now going in the same direction of increased state control in the energy sector. As shown by Ahrend and Tompson,this strategy immediately resulted in the sharp decline of output growth and investment rates. Major problems are awaiting thesecountries in the future, as state owned companies have proved to be much less efficient in developing new fields than the privateones. For example, Gazprom, the Russian natural gas monopoly, has not developed a single large gas deposit in the past 15 years(Milov).

Even state-owned companies can have incentives to increase efficiency if they face strong competition. Recently built pipelines,which bypass Russia, will certainly intensify competition between the oil and gas producing companies of the CIS region. In termsof competition the bad news is that Azerbaijan seems to be increasingly out of the game, as its oil reserves proved to be muchsmaller than was expected (Semikolenova).

In contrast to developed oil consuming countries, which according to Rogoff are well prepared for the current price rise, manydeveloping countries find the current situation very challenging. For China, whose fast-growing economy is widely believed tohave contributed to increased oil prices, the situation is extremely complicated. To be able to continue its fast and robust devel-opment it has to develop a comprehensive energy management strategy. Jiang Kejun provides different scenarios for China'sfuture demand and supply, and suggests policies needed to moderate the current demand growth rate.

At the G8 meeting, which takes place in St.Peterburg in mid July, energy security will be a major topic to be discussed. The arti-cles in this volume demonstrate that the best way to achieve energy security in both oil exporting and oil importing countries isto improve institutions. The first step in this direction may be to secure media freedom, which will help improve control overreform implementation by bureaucrats (Guriev, Sonin, and Egorov) and also improve corporate governance in private firms(Dyck, Volchkova, Zingales). Building better services, particularly in the finance sector, is another important step in the rightdirection. As argued by Arnold, Javorcik and Mattoo, the liberalization of this sector for foreign direct investments is one of thefastest ways to get results.

Ksenia Yudaeva, Managing Editor

From the Editor:

BT: Oil today trades at over US$70per barrel and prices are expected to stayhigh in the near future. Are we anywherenear an oil crisis similar to the one backin the 1970s?

No, I do not think it is a crisis situa-tion, in the sense that a global recession isimminent. High oil prices are an impor-tant issue in the global economy first andforemost because they imply huge gainsfor oil exporters and huge costs for oilconsumers. However, a significant part ofthe past few years' price growth has beendriven by a strong global growth, asopposed to actual or prospective supplyinterruptions.

In fact, academic researchers havelong doubted oil's reputed role as themain culprit for the low productivitygrowth and high inflation years of the1970s in industrialized countries. Overthe past ten years especially, academicwork has reached a broad consensus thatweak monetary policy was a much big-ger factor. During 1971—72, the FederalReserve increased the money supply byover 30% in an effort to boost demand,and help US President Richard Nixon's1972 re-election bid. Even without theoil shock, the Fed would have beenforced to undo part of this massiveincrease to avoid having inflation go intothe stratosphere. So a post-election reces-sion was on the cards long before OPECdecided to break free from Western con-trol of oil prices. The oil increase mag-nified the recession but was not the pri-mary driver.

BT: Is today's global economy betteradapted to high energy prices than it wasin the 1970s?

The most important change is thatcentral banks can be more patient whenoil prices rise than used to be the case.Over the past twenty years we have been

living in an era which economists call"the Great Moderation". Volatility hasbeen going down and financial marketshave improved, goods and labor marketshave become more flexible. Thanks toglobalization and more independentinflation-minded central banks, mone-tary policy has distinctly improved.Monetary authorities do not have toraise interest rates quite as quickly asthey used to, when inflation rose due toenergy price hikes.

It also helps that the share of energyin the industrialized countries' outputhas decreased almost by 50% since the1970s. Equally important, oil use is nowmuch more concentrated in transporta-tion rather than manufacturing. Thus oilprice hikes do not have the same knock-on effects through the economy that theyused to.

All this is not to say that we shouldbe totally calm about high prices. Oneimportant issue is the effect of oil priceson the already huge United States cur-rent account deficit, which has nowtopped 6% of US income. The IMF esti-mates that 50% of the increase in the UScurrent account deficit over the past twoyears has been due to oil imports. Giventhat a disorderly adjustment of the US

current account poses significant risks tothe global economy, and that the prob-lem is being exacerbated by oil pricerises, there is a chance that this recent oilprice cycle may not have a happy ending.

BT: Which countries are more vul-nerable to oil shocks?

I am actually far more concernedabout the oil-exporting countries than theoil-importing ones right now. High pricesare great for them, but part of this rise iscyclical and the question is how they willreact when lower prices hit. Most of theoil-exporting countries have very weakfinancial systems, making it hard forthem to deal with macroeconomic volatil-ity. High prices also make it difficult tosustain important structural reforms todiversify their economies. Because ofthese obstacles, most oil-exporting coun-tries have not enjoyed "the GreatModeration" to nearly the same degree asthe industrialized countries.

Russia, in particular, is certainly stillextremely vulnerable to oil price volatili-ty. Its financial system is still dominatedby state banks, with other forms offinance being woefully undersized. Inorder for it to develop better financialmarkets, it will need greater transparency,stronger institutions and stronger gover-nance. Russia has a lower degree of cen-tral bank independence than would bedesirable over the longer term for anchor-ing inflation and the economy. It has notjoined the WTO yet. So on all these frontsRussia is more vulnerable than sayCanada, another G8 energy exporter.

The bottom line is that despite thetrend for increasing prices in oil, thanksto India and China, no country shouldplan on US$70 oil being around forever.At some point in the next five to sevenyears, we will surely have at least a briefperiod of US$20 oil.

· 3Theme of the Issue: Energy

The World Bank & CEFIR

Kenneth Rogoff: “No country shouldplan on US$70 oil ... forever”Kenneth Rogoff is Thomas D. Cabot Professor of Public Policy and Professor of Economics at HarvardUniversity. He has extensively published on international finance, including exchange rates and cur�rent accounts, central bank design, and financial globalization, and is currently working on a book "Oiland the Global Economy". He shared his findings and views with BT's Olga Mosina during his recentvisit to Moscow

·4 Theme of the Issue: Energy


I should also note that there arecountries in Africa that spend 15% oftheir GDP on oil and energy imports, soobviously high oil prices mean a hugecost to them. However, some of thesecountries are still making out all rightthanks to the fact they export other com-modities whose prices have also beensoaring.

BT: What policies could help to miti-gate macroeconomic risks resulting fromoil price volatility?

For oil-producing countries there area host of issues. At the most basic level,they need deeper financial markets tohelp handle all kinds of volatility,including oil volatility. The ability tointernationally diversify some of theirrisks would also help. Unfortunately, thenationalization of oil companies makesit very difficult to diversify the risk;roughly 70% of the world's oil reservesare in the hands of national oil compa-nies. State-owned oil companies couldachieve some diversification throughfinancial contracts, but they cannotcarry this approach very far without

effectively giving up ownership. Havinga more flexible exchange rate wouldhelp a little, though diversification is thebig issue.

By the way, there are those who arguethat oil wealth is a "curse." This idea wascoined by the Harvard economic historianDavid Landes, who argued that when agovernment can tap a lot of naturalresource wealth it is under much lessimmediate pressure to develop a middleclass to generate economic growthbecause it can get growth from the natu-ral resources. But I think this idea hasbeen grossly oversold. The United Stateshas lots of natural resource wealth, so doCanada, Australia and New Zealand. So ifI was asked whether I would like to havemineral resources in the country where Ilive, I would take a chance and say "yes."The key is to have good institutions.

BT: What about oil-consuming coun-tries?

Most oil-consuming countries havedone a lot of homework already, and are

reaping the benefits today. They havedeeper financial markets, better regula-tion, and better monetary policy. If oil-exporting countries were able to achievethe same, they would surely face far lessdifficulties.

BT: Do these include the new EUmembers?

No, those countries still face a lot ofissues and high oil prices pose a lot ofproblems. The new EU members still use alot of oil in manufacturing which, as I havealready noted, causes far bigger knock-oneffects for the economy than when oil isconcentrated in transportation.

BT: Coming back to nationalization,how do you explain the recent string ofnationalizations in the oil and gas indus-tries?

It has been a long trend, and the situ-ation differs by region. Middle Eastcountries are rich in some dimensionsbut very underdeveloped in many others.They are still very much developingcountries working on building institu-

tions and decentralizing the economy.When these countries took over controlof their oil wealth from foreign oil com-panies a few decades ago, most of theircitizens surely benefited enormously. Butthat day is past and now they need tothink about how to expand their privatesectors.

Russia is clearly a different case.Russia's chaotic privatization in the1990s ended up in giving away a lot ofthe country's riches to a small number ofpeople. This virtual theft of nationalresources has created all kinds of legiti-macy and governance problems. Thepresent-day government's desire toredress some of the resulting problems isvery understandable, though reversion tostate control is not a solution, either. Iagree with Illarionov [former economicpolicy advisor to President Putin], whohas made the point many times thatcountries with privately-owned oil tendto do better.

BT: How would you comment on therecent events in Venezuela and Bolivia?

In Latin America it is really hard tosee any upside to the recent nationaliza-tions. In Venezuela, oil output is now60% of what it was before Chavez tookcontrol. It would have been better toimprove the redistribution of income andenforcement of tax laws than to nation-alize the oil companies. Bolivia's case isalso problematic. It is a classic expropri-ation of foreign assets with a short-termgain but potentially very big long-termcosts. Unfortunately, the recent national-izations of energy resources in LatinAmerica is a giant step backwards thatwill likely haunt the region for decadesto come.

BT: There is much discussion inRussia today about what to do with thestabilization fund, which has accumulat-ed over US$60 bln. How do you thinkthe fund should be best dealt with?

In general it is a good idea to set asidea portion of windfall gains from tem-porarily high oil prices. I hope the gov-ernment ultimately finds a way to redi-rect some of its higher revenues towardsachieving growth in some of the poorerregions, where infrastructure, health andeducation are all weak. Unfortunately, ashas so often been the case throughRussian history, a lot of money is endingup in Moscow, with a bit spilling over toSt. Petersburg.

BT: One of the main argumentsagainst using the funds is the risk ofhigher inflation…

In fact, saving money in an oil fundtakes pressure off inflation, because itpulls resources out of the economy.Anyway, a faster rate of ruble apprecia-tion would go a long way to solvingRussia's double digit inflation problems,which are among the worst in the world.Many in Russia have the view thatexchange rate intervention has beenhelpful in keeping the real exchange ratelow, but I doubt the cumulative effect onthe real exchange rate has been morethan 10 — 15%. Instead, the main effecthas been to force inflation to carry theburden of real exchange rate adjustment.This is not a desirable trade-off. By pur-suing its current policy of very low nom-inal appreciation, all Russia gets is highinflation. Russia could get just as goodgrowth by allowing the nominalexchange rate to appreciate. BT

In Latin America it is really hard to see any upside to the recentnationalizations

· 5


Crude oil prices rapidly increasedfrom around US$30/barrel (bbl) in 2004to close to US$70/bbl in September2005, equivalent to an increase of about133%. In spite of this rapid priceincrease, crude oil supply has beenalmost stagnant at 84 — 85 million bbla day, implying that crude oil productionhas been seriously constrained byresources availability.

Oil price volatility was also high dur-ing the period. The implied volatilityfrom crude oil call options reached highlevels between February 2005 andSeptember 2005, averaging about 30%and showing that the market was experi-encing major uncertainty regardingexpected price developments (see Figure1). Volatility increased even further, ris-ing to 40%, indicating that markets hadbecome very sensitive to small shocksand to news. For instance, after tempo-rary damage to U.S. oil refineries in theGulf of Mexico caused by hurricaneKatrina in September 2005, oil pricessoared beyond the $70/bbl mark.

Inelastic Demand, RigidSupply

What are the basic properties of oilmarkets that cause high volatility in oilprices?

A simultaneous equations modelapplied quarterly (for 1984Q1 —2005Q2) and annually (for 1970 —

2005) provides data supporting thehypothesis of low short-run price demandelasticity (ranging between -0.02 and -0.03), implying that changes in oil priceshave a small partial effect on demand forcrude oil. The volatility of oil markets andtheir vulnerability to small shocks is thusexplained by the fact that energy con-sumption is determined in the short-runby fixed equipment and prevailing tech-nologies and offers limited scope for sub-stantial variation in relation to pricemovements. The long-run demand forcrude oil is also price inelastic. Eventhough the long-run demand price elastic-ity is higher than the short-run one, it isstill low, ranging between -0.03 and -0.08.

Short-run income elasticity rangesbetween 0.12 and 0.19, clearly demon-strating that oil demand is responsive tochanges in economic activity. Highereconomic activity would entail anincrease in demand for oil.

Both the short-run and the long-rundemand for crude oil are negativelyrelated to the U.S. dollar nominal effec-tive exchange rate (NEER). The NEERelasticity ranges between -0.03 and -0.09: an appreciation of the U.S. dollarwould tend to make oil more expensiveand would reduce the demand for crudeoil. The interest rate tends to act nega-tively on the demand for crude oil; anincrease in the interest rate would act toreduce the demand for crude oil andvice-versa. Changes in interest rates are

not transmitted instantaneously to theeconomic activity and prices; their effectis known to work with a delay.

The short-run supply of crude oil isprice inelastic. Producers do not expandoutput in the face of a price increasebecause of short-run capacity con-straints, quota fixation, or to preservesignificant price increases. Similarly, pro-ducers do not reduce output in the faceof large declines in prices. In some cir-cumstances of depressed oil prices, oilproducers may supply more than thequotas in order to generate badly neededbudgetary revenues. Short-run crude oilsupply is significantly influenced by nat-ural gas production. Short-run elasticityranges between 0.11 and 0.26. For thisreason, an increase in natural gas pro-duction may be accompanied by anexpansion in crude oil production.

Long-run price elasticity remains lowat 0.08, implying that long-run oil sup-ply is determined by technological fac-tors and discoveries, and is less respon-sive to prices. Natural gas continues toplay an important role in the supply ofcrude oil. These two products were per-fectly correlated over 1970 — 2005.

Thus the basic properties of the oilmarkets are the combination of lowprice, high income elasticities, and rigidsupply that explains high and persistentvolatility in the oil markets and the mar-ket power of producers.

Two�Way CausalityDuring 1970 — 2005, three epochs

can be distinguished:• The oil supply shocks of 1970 —

1986, with the oil price peaking atUS$41/bbl in 1980. As a result, worldinflation rose to two-digit levels, averag-ing 10.1% during 1974 — 81. Monetarypolicy had to be deployed to cope withthe oil shock and the oil-induced infla-tionary pressure. Interest rates kept chas-ing oil prices and peaked only after oilprices had reached a peak. Indeed, thefederal funds rate peaked at 19.08% in1981. Because of high interest rates, the

World Crude Oil Markets: MonetaryPolicy and the Recent Oil Shock

Noureddine Krichene

An oil demand shock, caused by record low interest rates, led to the exorbitant price increases in 2004�2005

Figure 1: Crude Oil Implied Price Volatility, February — August, 2005

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30.06.2005

14.07.2005

28.07.2005



NEER appreciated significantly, makingoil more expensive. Ultimately, world eco-nomic growth contracted sharply to ameager average growth rate of 0.8% dur-ing 1980 — 1982, forcing a sustaineddecline in both crude oil prices and theworld inflation rate during 1981 — 1986.

• The period of relative oil pricestability and stationary NEER during1986 — 1999. Interest rates were, how-ever, highly nonstationary, implying thatmonetary policy remained active andwas mainly geared toward maintainingthe growth and price stability momen-tum.

• The period of record low interestrates and a depreciating NEER during1999 — 2005. Interest rates were ostensi-bly taking the lead over crude oil prices.The federal funds rate was maintained at1% during 2003 — 2004. Crude oil pricesstarted rising rapidly, exceeding the markof US$70/bbl in September 2005.

The relationship between crude oilprices, interest rates, and the NEER ischaracterized by a two-way causality,depending on the type of shock. Duringan oil supply shock, oil prices affect inter-est rates; whereas during a demand shock,interest rates affect crude oil prices.

Tight Monetary PolicyHelps to Stabilize Oil Markets

During the oil supply shock period of1974 — 1981, under stable oil demandconditions, oil prices led interest rates.Monetary policy was deployed to pushoil prices down by forcing a downwardadjustment in the demand for oil com-mensurate with the supply disturbances.Such an adjustment was brought aboutby substantial increases in real interestrates through targeting non-borrowedreserves. Interest rates increase by six per-centage points for each 100% increase inoil prices. Indeed, the data show that

crude oil prices went up fromUS$11.17/bbl to US$40.97/bbl during theperiod, while the federal funds rate wentup from 4.61% to 19.1%. During thedeclining phase of oil prices in 1982 —1986 monetary policy was progressivelyeased in response to the abatement of therise in oil prices.

During the oil supply shock period,powerful actions on interest rates had tobe undertaken to choke off oil priceincrease, thereby causing a severe con-traction of world economic growth.These actions were reinforced by othermeasures that were simultaneouslyadopted to curb oil prices, such as hightaxes on petroleum consumption, energysubstitution and conservation, and tech-nological change oriented toward higherenergy efficiency.

During the demand shock of recentyears, under stable oil supply conditions,interest rates led oil prices. Low interestrates caused excess demand for crude oilwhich fed into higher prices. Consequent-ly, an important increase in real interestrates, similar to those experienced duringthe oil supply shock, might be required tobring demand in line with supply and con-tain the inflationary effect of high oilprices. This may cause a temporary con-traction in world economic growth.

The model predicts that a 1% increasein income leads to an increase in crude oiloutput by 0.49% and crude oil price by2.8%. Thus, an expansion of world eco-nomic growth could exert a strongupward pressure on oil prices. For naturalgas production, a 1% increase leads to anincrease of 0.30% in the crude oil pro-duction and a decline in oil price of

1.47%. An increase in the interest rateleads in the long-run to a decline in bothcrude oil demand and prices.

Thus, monetary policy, conductedthrough changes in interest rates and mon-etary aggregates, has a significant and pro-tracted effect on aggregate demand forgoods and services as well as on asset

prices such as exchange rates, housing andstock prices. The sustained pressure on oilprices observed in 2004 — 2005 can beexplained by an excessively expansionarymonetary policy, with interest rates fallingto record levels in an integrated interna-tional capital market. Stimulated by lowinterest rates and a depreciating U.S. dol-lar, demand for oil has expanded fasterthan supply. Given the short-run priceinelasticity of both oil demand and supply,equilibrium is obtained through a largeincrease in oil prices.

The main conclusion is that the stabi-lization of oil markets requires a tighten-ing of monetary policy and an increase inex-ante real interest rates. Based on datafor 1970 — 86, the degree of monetarytightening to rein in oil prices and theirinflationary implications may be sub-stantial and may involve a trade-offbetween inflation and output. In thesame vein, based on data for 1986 —2000, sustained noninflationary worldeconomic growth would require a degreeof stability in oil markets.

Noureddine Krichene is an Economist atthe IMF. The full paper can be accessed at:http://www.imf.org/external/pubs/cat/lon-gres.cfm?sk=18890.0. The views expressed inthe article are those of the author and do notnecessarily represent those of the IMF. BT

The stabilization of oil markets requires a tightening of monetarypolicy and an increase in real interest rates

Quarterly World Oil Demand Quarterly World Oil Supply

87868584838281807978

mb

/d

1Q2004

2Q2004

3Q2004

4Q2004

1Q2005

2Q2005

3Q2005

4Q2005

1Q2006

2Q2006

3Q2006

4Q2006

86

85

84

83

82

81

80

mb

/d

1Q2004

2Q2004

3Q2004

4Q2004

1Q2005

2Q2005

3Q2005

4Q2005

1Q2006

81,882,4

83,384,2

83,784,4 84 84,2

84,8

Source: IEA, http://omrpublic.iea.org/

82,681,3

82,2

84,2 84,6

82,583,3

84,285

85,5

87,7

86,4

· 7


The Oil Supply Potential of the CIS

Rudiger Ahrend and William Tompson

During 1998 — 2004, the Common-wealth of Independent States (CIS)accounted for 60% of the growth inglobal oil supply. The IEA expects theregion's share of world supply will con-tinue growing until 2010, albeit withKazakhstan and Azerbaijan accountingfor an increasing proportion of incre-mental CIS supply. The CIS appears setto remain the most important oil regionoutside the Middle East, though it is notdestined to become a real rival or alter-native to OPEC, whose market share isset to rise from about 40% in 2002 to53% in 2030.

Market�Oriented Strate�gies Pay Off

During the 1990s, policies towardsthe oil industry in the three largest CISproducers — Russia, Kazakhstan andAzerbaijan — were all broadly market-oriented and largely reliant on private-sector initiative:

• Russia largely privatized its oilindustry domestically to either oil indus-try insiders or financial groups. The stateretained ownership only of infrastructureand some residual production and refin-ing assets. Despite the impediments toforeign entry, the questionable nature ofmany privatization deals, and the conflictsbetween the new owners and the authori-ties, the sector that emerged from thisprocess was very dynamic. Investment,

output and exports all began to recoverrapidly following privatization, made pos-sible by the application of new technolo-gies in established fields and, in manycases, the employment of western oil serv-ice companies (see Graph).

• Kazakhstan and Azerbaijanopted for much greater foreign involve-ment, owing to their acute need for for-eign capital and expertise after independ-ence. Kazakhstan privatized its oil-sectorenterprises and proceeded to develop itsmajor fields on the basis of concessionsand production sharing agreements(PSAs) with foreign investors. Azerbaijanalso opted for PSAs involving foreign oilcompanies, albeit with the state-owned oilcompany a party to all of them. Thanks tothe on-going development of major newfields by foreign consortia Caspian outputand exports took off.

• The two minor CIS producers,Uzbekistan and Turkmenistan, opted fora third path, combining continued stateownership with little or no foreigninvolvement. The presence of alternativesources of export earnings (cotton)meant that developing their hydrocarbonsectors was not such an urgent priority.Both countries are relatively marginalproducers at present and neither showsany sign of raising production in thecoming years. Geological assessments,however, suggest that Turkmenistan mayhave much greater potential as an oilproducer than is generally recognized.

Greenfield DevelopmentsNeeded for Sustained Growth

The trend towards increasing statecontrol over oil and other "strategic sec-tors" in Russia casts doubt on theprospects for much-needed greenfieldprojects. The attack on Yukos reviveduncertainties about the security of proper-ty rights even as the authorities increasedthe tax burden on the sector. Arbitraryofficial behavior has been evident in bothtax administration and the administrationof the licensing regime. Some increase inoil-sector taxation was certainly warrant-ed, but recent changes have tended toaggravate the distortions created byRussia's profit-insensitive system of oil-sector taxation, which creates significantdisincentives both to raising current pro-duction and to investing in explorationand greenfield development. At the sametime, geopolitical rather than commercialconsiderations have gained importance ininfrastructure policy. This has contributedto a tightening of transport constraints onexports, even as tax changes have madeoil exports less profitable.

In Kazakhstan, too, friction betweenthe state and private (in this case, foreign)investors has increased markedly in recentyears, chiefly as a result of the state'sincreasingly aggressive interpretation ofconcession contracts and PSAs. A majorcontract term in the country's largest PSAwas overridden by legislation, despite pre-vious commitments to contract stability,and there have been repeated threats toforce a renegotiation of major contracts.The new tax and regulatory regimeadopted in 2004 — 05 is a major deter-rent to new projects, as is the requirementthat investors allow the state-owned oiland gas company, Kazmunaigaz, a 50%stake in any new project.

These policy changes have alreadycontributed to a slowdown in oil-sectorgrowth. Oil-sector investment fellsharply in Russia in 2004, soon followedby a sharp slowdown in the growth ofoutput and exports. The impact onKazakh growth has been much moremuted, because many of the new meas-ures apply only to projects undertaken

During 1998 — 2004, the CIS accounted for 60% of the growth in global oil supply

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: IEA, Oil Information 2005 Database. Data for 2005 are preliminary.

Russia

Azerbaijan

Uzbekistan

Kazakhstan

Turkmenistan

Former USSR

Production of Crude Oil and NGL (Millions metric tons)



from 1 January 2004. Even so, tougherregulatory policies do appear to haveconstrained production growth.Azerbaijan has arguably remained themost investor-friendly of the three states,and production there has boomed sincethe opening of the Baku-Tbilisi-Ceyhanpipeline in 2005. However, its long-termsustainability is in doubt, as a number ofprojects have been wound up after fail-ing to find the anticipated volumes ofcommercially recoverable reserves.

Looking to the FutureThe growing openness of both

Uzbekistan and Turkmenistan to greaterforeign involvement in their respectivehydrocarbon sectors reflects a welcomeawareness that they will need outsideinvestment and technology to realizetheir potential. At present, both foreignpolicy considerations and the weaknessof the investment environment suggestthat this role will be played increasinglyby Russian state-controlled companiesand by the national oil companies offast-growing consumer countries likeChina and India, which have been seek-ing to expand into the CIS and the rest ofthe developing world.

The trend in Russia and Kazakhstanis towards higher taxation, greater stateownership of oil-sector assets, andincreasingly aggressive and arbitrary

administration of licensing and otherregulatory regimes. Russia is now work-ing to address the distortions created byits profit-insensitive system of oil-sectortaxation, but the long awaited — andbadly needed — reform of subsoil legis-lation has stalled. Greater state interven-tion is likely to result in more confusionand delay when it comes to major deci-sions, such as exploration and invest-ment in greenfield projects. A commonfeature in both countries has been theweakness of the administrative, regulato-ry and rule enforcement capacities ofboth states, and the authorities' frustra-tion at their inability to capture oil rentsin an environment of very high prices.Yet it is far from clear that greater stateownership will ensure that the state doescapture these rents. It may simply lead totheir dissipation via poor performanceand rent-seeking by insiders.

In late 2003, state-controlled compa-nies in Russia accounted for about 17%of crude production. This figure hassince more than doubled and could reach45% by the time Yukos's assets are soldoff. Given the poor performance of mostRussian state companies with respect tocost control, productivity, corporate gov-ernance and innovation, this bodes ill forthe future. Moreover, greater state own-ership of oil-producing assets is likely todistort the incentives facing the remain-

ing private oil companies, because theyfear unfair treatment when competingwith large state-owned producers.

Given the sums already committed toexisting projects, Kazakhstan is still wellplaced to deliver strong growth over theyears ahead. However, major new proj-ects are unlikely under the present taxand regulatory regime, and it is far fromcertain that the country will triple outputby 2015 as planned, not least because ofconflict with investors over the develop-ment of export infrastructure. Russia isanother matter. It accounts for almost80% of CIS production today and hasconsiderable potential for further, albeitundramatic, growth. However, it faces amuch greater risk than Kazakhstan ofstagnating or even falling output over themedium term if significant new green-field projects are not developed in atimely manner.

Rudiger Ahrend is an Economist andWilliam Tompson is a Senior Economist atthe OECD Economics Department. The arti-cle is based on the author's paper "Realizingthe oil supply potential of the CIS: the impactof institutions and policies", available at:http://www.olis.oecd.org/olis/2006doc.nsf/linkto/ECO-WKP(2006)12. The opinionsexpressed in the article are those of the authorsand do not necessarily reflect the views of theOECD or its member states. BT

The Resource Curse and Media FreedomIn 1985, Mikhail Gorbachev faced a difficult dilemma.

Without allowing free speech, the reforms of the highly ineffi-cient bureaucracy and the command economy seemed all butimpossible. At the same time, free flow of information wouldthreaten the foundations of the Communist Party's rule.

Such a dilemma is quite typical for any autocratic ruler. Innon-democratic societies, the ruler needs independent sourcesof information on the outcomes of his policies, such as freemedia. Otherwise he cannot provide incentives to the bureau-cracy, which may result in poor economic performance andmay eventually cost him his job. The ruler may choose toallow media freedom; however, independent media will pro-vide all (even negative) information to citizens, therebyincreasing risks of overthrowing the ruler. Alternatively, theruler may build a secret service that would report on thebureaucracy directly to him. In this case, there is a risk of col-lusion between the monitoring organization and bureaucrats.

The trade-off between incentives for bureaucracy and theneed to "divide-and-rule" via suppressing information flowsis especially visible in developing countries with abundantnatural resources. On average, such countries perform less

successfully than resource-poor countries. There is now anemerging consensus that the major reason for the resource-rich countries' slowdown in economic growth is institutions.Our theoretical model predicts a negative relationship, whichshould be especially strong in less democratic countries,between resource abundance and media freedom. In the pres-ence of abundant resources, it becomes less important to pro-vide proper incentives for bureaucrats, which in turn reducesthe ruler's willingness to have free media.

The empirical analysis confirms theoretical implications:using Freedom House data on media freedom, Polity IVscores for democracy and autocracy, and BP data on oilreserves, we find that, controlling for the level of develop-ment and democracy, media are less free in oil-rich countries.The effect of natural resources on media freedom is especial-ly strong in less democratic countries, while mature democ-racies are relatively safe from the adverse effect of oil.

Sergey Guriev is Associate Professor and Rector of New EconomicSchool (NES), Moscow. Konstantin Sonin is Assistant Professor at NES.Georgy Egorov is a Ph.D. student at Harvard University. The piece isbased on the working paper available at:http://www.cefir.ru (#63). BT

· 9


Management of Energy Resourcesin China

Jiang Kejun

Due to rapid economic growth inChina, total primary energy consump-tion increased from 400 Mtoe in 1978 tonearly 1.32 billion toe in 2004, with anannual average growth rate of 4.7% (seeFigure 1). The major reason for the ener-gy demand surge is the rapid expansionof energy intensive production. Forexample, steel output increased from131 million ton (Mt) in 2000 to 297 Mtin 2004, other energy intensive productsincreased by similar amounts.

The World’s Largest CoalProducer

• Coal. China is the world'slargest coal-producing and coal-consum-ing country. Between 1980 and 2004,total raw coal output increased from 620Mt to more than 1900 Mt, with an aver-age annual growth rate of 4.8% per year.The heavy dependence on coal has led toserious environmental problems and is aburden for the transportation system.

• Electricity. The total installedcapacity of electrical power generationincreased from 66 gigawatt (GW) in1980 to 440 GW in 2004, of whichhydropower accounted for 23%. It isreported that 24 provinces out of 31 suf-fered from power shortage during thesummer of 2004.

• Oil. Between 1980 and 2004,total crude oil output increased from 106

Mt to 175 Mt. Crude oil output in Chinaaccounts for 4.7% of the world total.However, due to the rapid increase ofpetroleum demand, oil imports are becom-ing a significant factor in China's energysupply.This has a significant impact on theinternational oil markets and Chinese oilcompanies' future strategies.

The recent energy demand increasehas caused energy supply shortage andenvironmental problems. Recognizingthe seriousness of the situation, theChinese government has introduced var-ious policies and regulations. Energy effi-ciency improvement and energy conser-vation are given high priority in theenergy development strategy, as is theefficient and clean use of coal and otherfossil fuels. The government has set up atarget of 20% energy intensity reductionby 2010 compared with that in 2005.

Energy Demand 1.9�2.4Billion Toe in 2020

We explore future energy demand,production and supply based on energyresource availability, environmental con-straints, and develop three scenariosbased on the global IPAC-Emissionmodel and IPAC AIM/ Technologymodel for China. The models projectfuture energy demand and output. Themajor assumptions include population

growth to 1.53 billion by 2030, andGDP growth by 8.2% until 2010, 7%between 2010 and 2020, and 5.6%between 2020 and 2030.

• The baseline scenario assumesgrowing international trade andincreased globalization of China's econ-omy. Therefore China will be able to relyon international energy markets andresource imports to meet part of its ener-gy supply needs.

The results of the model show thatprimary energy demand in the baselinescenario could go up to 2.1 billion toe in2020 and 2.7 billion toe in 2030. Coalremains the major energy source in Chinawith a 58% share in total energydemand, but the natural gas share in theenergy demand increases rapidly, from4% in 2000 to 17.3% in 2030. Electricitydemand almost quadruples to 451 Mtoeby 2030. Demand for oil products used intransport increases 5.5 times to 410Mtoe by 2030, due to the rapid growthof the number of vehicles in China.

• The high demand scenarioassumes a higher demand for energy inthe future due to China's role as a glob-al manufacturing center following WTOaccession, which will bring more energy-intensive production to China, such assteel, non-ferrous products and buildingmaterials. At the same time, the scenarioassumes growing technology transfer

By 2030, China's fossil energy imports could reach 680 million tons of oil equivalent

Figure 1. Energy Production and Consumption in China

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Beyond Transition • April—June 2006

and the application of energy efficiencytechnologies.

This model results in primary energydemand reaching 2.9 billion toe by2030, which is 250 Mt higher than thebaseline scenario. Of the total primaryenergy demand, coal provides 59.1%, oil16.1%, natural gas 17.8%, and nuclearenergy 1.2%. Because this scenarioassumes better integration in interna-tional markets, there is greater relianceon imported natural gas and oil.

• The policy scenario assumes theimplementation of various energy andemission control policies and a lowerenergy demand, which reflects energysupply and environmental constraints.The policies include: end use technologyefficiency promotion; introduction ofenergy efficiency standards for buildings;vehicle and energy taxes; renewable ener-gy development; increasing share of pub-lic transport in cities; transport efficiencyimprovement and use of fuel-efficientvehicles; increased efficiency of coal firedpower plants; enhancement of natural gassupply; and nuclear power development.

Compared to the baseline scenario,the energy demand would be lower bynearly 280 Mtoe by 2030. In order toachieve such a reduction in demand, thisscenario requires timely implementationof the policies mentioned above.

Abundant AlternativeEnergy Resources

As for the energy resources, coal isexpected to continue playing a key role inproviding energy security for the country,but it will perhaps take a smaller share inthe total fossil fuel resources compared tothe current share of 96%. Natural gashas historically received less attention,but in the past two years three very largenatural gas fields were discovered in

mainland China. Regarding hydropower,transmission from the hydro resource-rich south-west of China to the easternpart, and small-scale hydropower devel-opment are the main priorities. Chinaalso has good prerequisites for develop-ing nuclear power. These include produc-ing energy, supplying nuclear fuel, pro-cessing used fuels, and having the neces-sary technologies at hand.

As for alternative energy resources,biomass resources from agriculture,forestry and timber industries, andmunicipal waste have the potential forplaying a decisive role in China's energysupply, with, as one example, wastesfrom agriculture potentially yieldingnearly 80 billion m3 of biogas. With alarge land mass and long coastline,China has relatively abundant windresources for the further development oflarge-scale wind power. According toestimates by the China MeteorologyResearch Institute, land-based andocean-based exploitable wind resourcesrepresent a potential power generationcapacity of about 1,000 GW. China isalready tenth in the world in terms oftotal installed wind power capacity andhas 40 wind farms established.

Energy Supply ScenariosHaving simulated future energy pro-

duction in China, we find that • Coal production could reach

1.48 billion toe by 2030. Coal demand,therefore, could exceed domestic coalproduction in China.

• Oil production is projected toreach 175 Mt by 2030.

• Natural gas production is expect-ed to reach 312 billion m3 by 2030.

• Nuclear power generation willincrease quickly in the future reaching344 TWh by 2030 (compared with 16.7TWh in 2000), but will still represent a

small share of the total energy produc-tion, because of its high cost.

• Hydropower output willincrease from 224 TWh in 2000 to 722TWh by 2030, with capacity reaching201 GW by 2030.

Consequently, the need for future fos-sil energy imports in the baseline scenariois 375 Mtoe annually by 2020 and 562Mtoe by 2030. As a comparison, in 2000,the USA imported 870 Mtoe. Oil will topthe energy imports, but even coal needs tobe imported after 2020, with 129 milliontons of coal needed annually.

In the high demand scenario, energyimports are much bigger (see Figure 2).Total fossil energy import will be 445Mtoe by 2020 and 680 Mtoe by 2030.Even more coal needs to be imported inthis scenario.

To ease the pressure on energy sup-ply, well-designed energy strategiesshould be developed. These includedevelopment of new generation tech-nologies, use of energy tax, resource taxand export tax for energy-intensiveproducts in order to promote energy sav-ing, development of renewable energyand the establishment of a diversifiedenergy supply. Clean coal technologyshould be emphasized in order to miti-gate emission form coal combustion.Due to low production costs China islikely to become the global manufactur-ing center relying on energy andresource-intensive production. This trendshould be carefully controlled, and exter-nal costs to the environment should beincluded in production costs.

Jiang Kejun is a Research Professor atEnergy Research Institute. The full text of thepaper can be accessed at: http://siteresources.worldbank.org/INTDECABCTOK2006/Resources/Kejun_Energy_China.pdf BT

Coordinated efforts by the international community canplay a significant role in promoting energy security. An agen-da for action could include the following key elements:

• Actively promoting more efficient use of energy inall economies through developing programs to agree broadsets of objectives and international benchmarking, and facil-itate exchange of information and technologies;

• Facilitating the access and security of cross borderenergy investment and transit, so as to allow global andnational fuel and supplier diversity;

• Building on the G8 commitment at Gleneagles to alow carbon economy and adaptation to climate change byintegrating this with the energy security agenda;

• Supporting and strengthening initiatives by interna-tional institutions and others to support the poorest coun-tries in their adjustment to short term energy price shocks,and, in the longer run, to make healthy, clean affordableenergy available to all their citizens;

• Promoting transparency about energy resources, useand production through the whole energy chain, especially inthe critical oil market, by supporting and supplementing cur-rent initiatives and approaches as needed.

Source: World Bank briefing paper: Energy Security Issues,http://siteresources.worldbank.org/INTRUSSIANFEDERATION/Resources/Energy_Security_eng.pdf BT

· 11


Caspian Oil: Changing the World's Energy Outlook

Yadviga Semikolenova

After the collapse of the Sovietempire, the Caspian states of Azerbaijanand Kazakhstan managed to generate agreat deal of excitement over wildcatexploration of its poorly researched oiland gas fields. Despite falling oil prices,uncertain reserve sizes and a non-exis-tent legal framework, an extraordinaryvolume of international investmentpoured into the region in 1997 — 1998.By 1999, over 20 oil exploration con-tracts were signed in Azerbaijan alone,which represented over US$30 billion inlong-term capital investment with someUS$2.5 billion in committed investment.In Kazakhstan, direct foreign investmentin oil and gas amounted to US$2 billionfor 1991 — 1996. It was widely expect-ed that the poorly explored, but high-potential Caspian oil reserves wouldchange the world energy market and pro-vide an alternative to Middle Eastern oil.

However, the expectations overCaspian oil turned out to be quite exag-gerated and soon the Caspian hype wasover. Most of the projects failed to findenough reserves to justify commercialdevelopment of the fields. After 1999,most contracts were either closed or puton hold; and, two oil companies, Arcoand Conoco, decided to exit the region.

Caspian Oil Boom 1997�98:Information Herding?

The mid 1990s Caspian frenzy is dif-ficult to explain.

• The size of the Caspian provenreserves was not significant enough toattract such a massive investment flow insuch a short period of time. Azerbaijanand Kazakhstan's proven oil reserveswere 3.6 and 10 billion barrels respec-tively, which were much smaller than,say, Russia's 56 billion barrels.

• The potential size of Caspianreserves was quite uncertain for prospec-tive investors. The estimates of the upperboundary of probable reserves variedfrom the US Department of the Interior'sapproximation of 13.2 billion barrels inAzerbaijan to the estimate of 27 billion

barrels by the US State Department.• World oil prices were falling

when most oil companies entered theCaspian exploration projects in 1997 —1998. By the time the oil prices recoveredin 2000, the Caspian frenzy had died.

However, the dynamics of theCaspian frenzy may be explained byinformation herding. A lot of investorscould have come to the Caspian region asa part of the herd that was created byavailable public information, such asinvestment decisions by first-comers tothe region, the results of the first drillings,and various reports of credible agencies.The majority of the companies came tothe region in 1997 — 1998, after the USDepartment of State released its high esti-mates of Caspian potential reserves, andafter the first project moved to the devel-opment stage in November. The frenzywas over after the news of empty wellsand closed projects became available inlate 1998 and early 1999.

BTC: A New Energy Order?Everything changed, however, in the

spring of 2006 when the Baku-Tbilisi-Ceyhan (BTC) pipeline, connectingCaspian oil with the Turkish port ofCeyhan, became operational. A few daysearlier natural gas began passingthrough the newly completed SouthCaucasus Pipeline (SCP), which willdeliver gas to the Georgian and Turkishmarkets.

The talks about the possibility of anoil transit route bypassing Russia startedas early as 1994. As part of a ProductionSharing Agreement between Azerbaijanand BP signed in 1994, foreign investorswere supposed to find an export route forland-locked Azeri oil. Several possibleroutes were looked at, included the Baku-Novorossiysk pipeline through Russia,Baku-Supsa to the Georgian Black Seaport, and BTC to Turkey.

Before 2003, none of the bypassesseemed threatening enough to affect theRussian regional monopoly on oil trans-portation. According to experts, the

existing Baku-Supsa route together withthe Russian route to Novorossiysk couldonly have been expanded to transport450,000 barrels of Caspian oil a day, notenough to transport Caspian crude whenAzerbaijan’s fields of Azeri, Chirag anddeepwater Guneshli (AIOC contract leadby BP) would come to full productionstage in 2007 — 2010 averaging700,000 — 800,000 barrels per day.Thus, before 2003, it looked quite likelythat after AIOC moved to the full pro-duction stage Russian pipelines would bethe only export solution for the Azeri oil.

However, in late 2003 the threat of abypass became much more credible. Asoil prices were going up, the BTCPipeline Company, formed in 2002 andled by BP, found enough investors to goon with the project. The following year,Azeri and Kazakh officials launchedtalks on directing Kazakh oil flowsthrough BTC. In the fall of 2005 thepipeline was completed and in June2006, the first BTC oil reached theCeyhan terminal.

The competition of the Baku-Tbilisi-Ceyhan and the South Caucasus pipelinesis a huge milestone marking the end ofRussian dominance on the European ener-gy markets. The pipelines will re-shapeenergy consumption and the geopolitics ofthe region. First, they will decreaseRussian near-monopoly on energy transitfrom the Caspian states to global markets.Second, Russia will have to adapt to inter-national competition, but the way it doesso is difficult to predict. Third, Europeanconsumers now have access to Caspianenergy avoiding Russia all together, bothas an energy producer and transporter.Finally, Turkey will gain an importantposition on the European energy marketas a new energy crossroads.

Yadviga Semikolenova is AssistantProfessor at Division of Economics andBusiness, Colorado School of Mines. Thisarticle is based on two working papers thatare available upon request by contacting theauthor: [email protected] BT

Competition from two new pipelines marks the end of Russian dominance on European energy markets



Vladimir Milov: "The state shouldleave the energy sector”

BT: Energy security will be one of thekey topics at the G8 Summit in St.Petersburg this year. What do Russia as awhole and Gazprom in particular, meanby energy security?

Because energy resources are highlyunevenly distributed among differentcountries, it is fair to say that the conceptof energy security varies from country tocountry depending on their resources ortheir access to resources in other coun-tries. The term itself appeared in import-dependent developed countries after theArab oil embargo in the 1970s, but a con-sensus understanding of energy securityhas never been achieved. Although Russiaproposed the theme of energy security forthe G8 summit a year ago I regret to saythat during the past year the world hasnot moved any nearer to common under-standing. Preparation for the summit hasbeen an intellectual debacle and Russia,unfortunately, has only been able to offerthe world a set of cliches that areremoved from the real situation. Indeed,by our practical actions we merely com-pounded the uncertainty in this sphere.

BT: Why should countries be inter-ested in achieving a consensus?

President Putin quite rightly wrote inhis article in The Wall Street Journal lastFebruary that energy egoism does notpay. About three quarters of world energyresources are concentrated in some tencountries which produce a little over 5%of world GDP in purchasing power pari-ty. The countries which produce morethan 70% of world GDP own only 10%of oil and gas resources, which are gradu-ally being depleted. Such a global imbal-ance is fraught with serious conflicts.Unless humanity creates a system thatguarantees the stable supply of energyresources in required amounts from sev-eral resource-rich countries, we will faceresource wars. I think it will depend in the

first place on the situation in such coun-tries as Russia, Saudi Arabia and Iran.

The role of Russia in oil is not asglobal as that of Saudi Arabia, however,Russia controls more than a third of theworld's proven gas resources and, ifadding yet-to-be-found resources, thenthis figure may rise to almost 50%. Theglobal gas demand will only be increas-ing: over the past 15 years gas consump-tion has been growing much faster thanthat of any other fuels in practically allthe regions of the world.

At present, especially now that thestate has gained control over keyresources, primarily over Gazprom,Russia is behaving in a rather selfish wayand claims special terms for the energysupplies into international markets. Thisviolates a kind of tacit understandingwith the West dating back to the times ofthe Soviet Union: we provide you withenergy in return for very good money, anarrangement that earned the country thereputation of a reliable supplier. NowRussia wants something more. Today theRussian authorities say that they want togain access to distribution networks inEuropean countries in exchange foraccess to Russian resources. But whatwill they demand tomorrow? If all theresource-rich countries start behavinglike this a serious situation may arise.

Energy security can be approached ina different way, namely, by finding abasis for a global consensus and offeringlong-term guarantees to resource-richcountries that they would be able toinvest in energy with a minimum risk.

BT: What guarantees do you see?Long-term contracts?

I wouldn't like to speak about con-crete mechanisms, there are many, andlong-term contracts are the simplest ofthem. What is important is to recognizethat producing countries need somecommercially attractive terms for devel-oping their resources, while the import-ing countries need guarantees that theywill get enough resources on marketterms. And no country will try to usurpresources or claim any special politicalprivileges in the international arena.

BT: Many experts and investors areworried about declining production inGazprom's main fields in WesternSiberia. But its CEO recently struck anoptimistic note at the world gas congresswhen he said that "in 2005 Gazpromregistered the largest growth of gasresources since 1993." How justified arethe fears of a possible shortage of gasand how serious can the consequences befor internal and external consumers?

The problem is not that Russia has noreserves in the ground: at current levels ofproduction, the resources will last morethan 80 years. There is a huge problemwith the economic system and incentivesto ensure timely extraction of the reservesfrom the ground and their delivery tomarket. In 1992, when Gazprom was cre-ated, the idea was mooted of creating sev-eral private independent gas companiesthat would compete among themselves.In the event, the advocates of a central-ized system prevailed, their main argu-ment being that only a powerful vertical-

Vladimir Milov is President of the Energy Policy Institute in Moscow and a former Deputy Minister ofEnergy of the Russian Federation. He shared his views on energy security and the problems of theRussian gas sector with BT’s Olga Mosina

· 13


ly integrated company could develop thegiant gas fields. It is true that Russia hasvery large deposits, for example, just twoof them on the Yamal Peninsula, accountfor more than 10% of all proven Russiangas resources. The problem is that 15years later, Gazprom has only developeda draft feasibility study for one of thedeposits, which was rejected last yearbecause of the inferior quality of thematerials. In my opinion, that is anindictment of Gazprom.

The very large gas condensate fieldsput into operation in the Soviet times,such as the Urengoy and Yamburg, whichtoday provide the bulk of Russian output,are rapidly being depleted. All Gazpromcan do in the near future in order to pre-vent a slump in production is to put near-by satellite fields into operation. But thatpotential will be quickly exhausted.

Gazprom's accrued investments ingas field development over the past sevenyears, amount to a mere US$12.5 billionin current prices. As a comparison,investments in oil production reachedUS$37 billion between 1999 and 2004,and the growth of oil production inrecent years has truly been an investmentgrowth. Gazprom, by contrast, prefers toinvest in other projects. In previous yearsit prioritized pipeline construction (main-ly export pipelines), and the purchase ofassets in oil, power and petrochemistryindustries.

Gas shortage is not a "prospect", it isalready here. Because gas demand ishighly seasonal, the shortage is visibleonly during peak periods, in winter. Allconsumers, both Russian and foreign,suffered during the last winter chills. Thesupply of gas to the power industry (themain consumer of gas in Russia) in sev-eral energy zones dropped to 15% of theagreed amounts on certain days. At thesame time Gazprom could not provideenough gas for Ukrainian and Europeanconsumers. The Ukrainians, who havefirst access to the pipeline, could tap intogas supplies, but the Europeans missedout on substantial volumes of gas.

BT: Are Gazprom's real interests notin extracting gas, but its export, process-ing and sale?

Gazprom prefers to invest instrengthening its monopoly power. Thecompany only has an annual budget anddoes not do long-term financial plan-ning. Implementing long-term risky proj-

ects runs counter to the economic logicof the very existence of the company.Gazprom looks exclusively to short-termtransactions, and it views borrowing notas a source of financing new projects butas a means to cover the cash gaps. Onecould perhaps understand Gazprom'sdifficulty in balancing the budget attimes of payment arrears by Russianconsumers and low gas prices in Europe.But today, with soaring prices in Europe

and a threefold increase of domestic realprices in the last six years, the companyis still barely making ends meet. In myopinion, it proves that Gazprom's eco-nomic system has no economic andinvestment logic, but is merely a tool inthe hands of external and internal lobby-ists. As a result, Gazprom invests inthose projects that may bring profits toinsiders or may increase its monopolypower and bring quick returns.

BT: What do you think of Gazprom'sstatements about exchanging assets withEuropean companies?

It is a natural way of integratingRussian business into international busi-ness. Russian oil and gas companiesestablished through privatization in theearly 1990s are not competitive in theinternational market. They need accessto new technologies and expertise ininvesting in complex long-term projectsthat large international corporationspossess. The value of integration inwhich the interests of various nationsintertwine lays the foundation for non-political, effective, and stable interactionbetween resource-rich and resource-poorcountries. Integration with Europeancompanies would have been possible ifour leaders did not meddle in pursuit oftheir own personal interests or attemptto control everything.

BT: Should the Europeans, then, beafraid of Gazprom investments in theirgas distribution networks?

Gazprom is not perceived as the bestagent for cooperation. First, the companyhas a host of internal problems and mas-sive inefficiencies, which impedes the cre-ation of alliances based on commercialconsiderations. Second, Gazprom is a

state-owned company and it is feared forpolitical reasons. But Russia itself behavesin a similar way. For example, the state-owned Chinese CNPC was blocked fromthe Slavneft auction in 2002.

Gazprom brags about its agreementwith BASF/Wintershall to sell a share inthe South-Russian field, but so far it hasbeen a one-off case and most probablyan exception from the rule, especiallysince Wintershall has a long history of

relations with some Gazprom insiders.Gazprom has no other examples of suc-cessful partnership, and has so far beenunable to agree with the German EON-Ruhrgas, Italy's ENI and Enel. The mainreason for failing partnerships isGazprom's political background.

BT: Could asset exchange lead todividing up Gazprom? Or, because youare skeptical about cooperation as such,what future awaits the company?

I think Gazprom's future is even worsethan the Soviet Union's in the late 1980s.I don't want to be a prophet of gloom anddoom, but I think we will see a completedisintegration of the sector with verygrave consequences for the gas market.

Gazprom holds licenses for hugefields which are not being developed.The sale of licenses or an equity share incompanies that develop the fields to out-side investors could solve the problem ofGazprom's accumulated debt and enableits restructuring. At the same time, out-side investors could have an opportunityto quickly develop the fields.

In the meantime, Gazprom is insistingon keeping the controlling stake in everyproject which, given its present financialsituation, decision-making process andgeneral effectiveness, makes equityfinancing of major projects impossible.

The development of oil fields by pri-vate foreign investors, for example theSakhalin-1 and Sakhalin-2 projects, hasshown that assets that fall into privatehands are already yielding returns. Theseprojects seem to be fairly successful,unlike other major Sakhalin projects inwhich the state has chosen to be in thedriving seat and where nothing has beenhappening. The state must leave the ener-gy sector and open it up to foreign com-panies if there is to be any progress. BT

Gazprom prefers to invest in strengthening its monopoly powerand looks exclusively to short�term transactions


Human Capital and the "Resource Curse"

Natalia Volchkova and Elena Suslova

One of the main issues on Russia’sdevelopment agenda is accelerating eco-nomic growth and creating an infrastruc-ture capable of sustaining that growth.The so-called "resource curse", whichrefers to an empirical regularity suggest-ing that the economies of resource-richcountries on average grow more slowlythan those of resource-poor countries,can be a major obstacle along that road.

Three Channels Modern economics has three main

groups of hypotheses regarding the chan-nels through which the "curse" is spread:

• The macroeconomic channel isconnected with the high resource pricevolatility in the world markets and theresulting volatility of GDP and nationalrevenues of resource-rich countries, whichmay be a serious obstacle to achievingsustained long-term economic growth.

• The most frequently discussedmicroeconomic channel is the so-called"Dutch disease", which refers to the flowof production factors from the manufac-turing industry into the sectors that pro-duce goods exclusively for the internalmarket (primarily, the service sector) andextractive sectors, in response to growingincomes in the extractive sectors. Howe-ver, empirical studies of many resource-dependent countries do not bear out thehypothesis of the negative correlationbetween the rate of long-term growth andvolatility of trade terms, nor of the nega-tive impact of the size of the extractivesector of industry on the size of the man-ufacturing sector. Studies of the dynamicsof the extractive and manufacturing sec-tors in the Russian economy over the past15 years has not provided any evidence ofa "Dutch disease" in Russia.

• More and more scholars areinclined to think that the main obstacleto further development of resource-dependent countries are insufficientlydeveloped institutions. However, in com-modity-oriented economies, because ofthe high economic rent created in theextractive industries, institutional back-wardness may make economic policymeasures aimed at stimulating the econ-

omy counter-productive, still furtherincreasing the country's dependence onraw materials.

A combination of a significantresource rent, poor property rights pro-tection, undeveloped and imperfect mar-kets and a poor legal system may be verydestructive to economic development.Many of the civil conflicts in the 20thcentury stemmed from attempts to seizecontrol of the rent; the fight for the rententails corruption in business and thestate, which substantially distortsresource allocation in the economy.

The availability of vast resources andthe constant flow of revenue they generateare not conducive to creating incentivesfor the state to carry out economic reform,the streamlining of public administrationand improving the quality of institutions.In other words, vast stocks of resourcecapital squeeze out the social capital.

Underdeveloped HumanCapital ?

Our analysis of 44 countries and 11sectors in the period between 1980 and1990 warrants some conclusions regard-ing the development of human capital inresource-dependent economies and itsimpact on economic growth.

The hypothesis about the existence ofthis channel for the spread of the"resource curse", as a part of the institu-tional channel, is based on two premises.First, many studies point out that re-source-rich economies sometimes tend tounderinvest in human capital comparedwith resource-poor economies. Resource-intensive sectors in the economy absorbthe bulk of investments in the economywithout creating highly skilled jobs. Thisis a disincentive for both private and pub-lic sectors to invest in education.

Second, both the classical and newgrowth theories stress the importance ofaccumulating human capital for generat-ing long-term economic growth. So, onecan expect that resource-rich countrieslose out to resource-poor countries interms of the rate of growth becausehuman capital in the former is not suffi-ciently developed.

Our approach to the study of the"resource curse" is based on the "differ-ence-in-difference" method, whichmakes it possible to track down the dif-ference in the growth rates of varioussectors of industry in various countrieswhile controlling for country and sec-toral variables. Sectors of industry areranged according to the particular sec-tor's demand for human capital at a cer-tain level, and countries are orderedaccording to the availability of naturalresources.

Human Capital�IntensiveIndustries Suffer

Analysis has shown that the differ-ence in the growth rates of the sectorsthat need a large number of workerswith a high human capital level and thesectors that have less need for suchworkers is less in countries with a highshare of primary exports. In otherwords, in the resource-rich countries thesectors that rely more on workers with ahigh level of human capital — and theseare the petrochemical industry, engineer-ing (other than electronics) etc. — are ina less favorable position compared, forexample, with the food industry, than inresource-poor countries. The result hasalso been confirmed for yet another cri-terion of resource wealth, the productionof oil and other hydrocarbons.

Summing up,• Intensive use of natural

resources suppresses growth in sectorsthat need workers with a high level ofhuman capital;

• The more a sector depends onhuman capital the more it loses out at thehands of natural resource development.

The results undoubtedly stress therole of investments in education as amechanism for overcoming the"resource curse".

Natalia Volchkova is a Senior Economistat the Centre for Economic and FinancialResearch (CEFIR) in Moscow. Elena Suslovais a graduate student at New EconomicSchool. The paper is forthcoming as CEFIRworking paper at www.cefir.org. BT

Intensive use of natural resources depresses growth in sectors employing workers with a high level ofhuman capital


Energy Poverty in Macedonia andthe Czech Republic

Energy poverty is a condition wherehouseholds are living in inadequatelyheated homes, which can mean that eitherthe average daytime indoor temperature isbelow the biologically determined limit of21°C, or that the amount of warmth inthe home is lower than the subjective min-imum which allows an individual to per-form his/her everyday life.

Many countries in Central andEastern Europe and the former SovietUnion have undertaken significant energyprice increases, with the aim of removingthe inherited price structure. As most gov-ernments have been unable to develop thenecessary social safety net to protect vul-nerable households from price increases,there is a danger that energy poverty mayaffect millions of households in the region

leaving them with no option other than tocut back on energy purchase.

Energy poverty may create, and beperpetuated by, vicious circles betweeninvestment patterns, politics, and socialdeprivation. This is because the level offinal useful warmth in the home is relat-ed to the energy efficiency of the builtfabric, energy distribution installations,and domestic appliances. Patterns ofenergy poverty are thus contingent onlevels of investment and maintenance ofthese capital stocks. In the countrieswhere energy reforms have been slower,one of the reasons for the persistence ofcross-subsidies is the fear that energyprice increases may push significantnumbers of households into domesticenergy deprivation, thus causing socialand political unrest. But the maintenanceof below-cost pricing in the residentialsector hampers investment in the capitalstocks of energy efficiency, while encour-aging wasteful energy practices.

The study of the institutional, spatialand social underpinnings of energy pover-ty in Macedonia and the Czech Republicrelies on semi-structured interviews with

policy-makers, professionals, and house-holds in the two countries, as well as ana-lyzes of income and expenditure patterns,subjective perceptions of well-being, andassessments of housing quality.

Macedonia: Energy Povertyis a Lower� and Middle�ClassPhenomenon

One of the main aims of recentMacedonian economic policies was therestructuring of the state-owned ElectricPower Company of Macedonia thatmanaged all of the country's electricitygeneration, transmission and distribu-tion facilities. In order to prepare thestate-owned electricity monopoly for pri-vatization, household electricity tariffs

and disconnection rates were more thandoubled during the 1990s. Yet the coun-try failed to develop a comprehensiveenergy efficiency investment program inthe residential sector. So far Macedonialacks an adequate legal and institutionalframework for the formulation andimplementation of energy efficiency poli-cies, as well as effective mechanisms toregulate the thermal efficiency of newhousing. This is despite the fact thatnearly all housing in Macedonia is pri-vate and owner-occupied.

The emergence of the energy povertyproblem has transpired against the back-drop of a rapid increase in general pover-ty. The percentage of the population livingunder the relative poverty line now standsat nearly 30%, up from 4% in 1991. YetMacedonia still lacks a targeted energypoverty-amelioration policy. The onlymechanism is a relaxed disconnection pol-icy tacitly implemented by energy utilities,who often allow residential consumers tocontinue using electricity or district heat-ing despite months of non-payment. As awhole, these developments have led to ashift towards biomass (mainly wood) in

the national residential energy balance, sothat approximately 70% of the popula-tion currently relies on it for domesticheating, especially in rural areas. Districtheating networks outside of the capital,Skopje, are almost completely nonexist-ent. In medium-sized towns without dis-trict heating, households have been forcedto rely on electricity for heating, and thenumber of such households has grown toapproximately 30%.

The demographic extent of energypoverty remains unknown, as there havebeen no direct surveys on the subject.However, the size of the problem can beestimated with the aid of the "compen-sating variation," which is applicable tonational household expenditure surveys.This method quantifies the percentage bywhich household incomes would havehad to change in 2004 in order for themto be able to retain the same ratio ofenergy expenditure relative to thenational average in 1995, when energyprices were still relatively low.

It transpired that the 60% of house-holds with lowest incomes would have toreceive additional funds ranging between27% and 1% of total equivalent income.At the same time, income would have tobe "taken away" from the top 30% ofhouseholds in order for their energyexpenditure ratios to remain the same in2004 and 1995. This means that the rela-tive energy expenditures of better-offhouseholds have increased in comparisonto the 1995 level, while the bottom 60%have been forced to cut back on theirenergy purchases (see Table).

The 60% figure is matched by surveysof subjective well-being, according towhich only 38% of all householdsthought that they were able to keep theirhome adequately warm in 2003,although the share was 46% only threeyears earlier. Thus, energy poverty has amuch wider demographic extent than sta-tistically defined income poverty. Theresults of the compensating variationanalysis also indicate that residentialenergy efficiency improvements have yet

Energy poverty arises out of the inadequate co�ordination of energy, social welfare and housing policies

Stefan Buzar

· 15New Findings


60% of the poorest Macedonian households would have to receiveadditional income to maintain their 1995 energy expenditure

·16 New Findings

to be felt among the wealthiest parts ofthe population. In normal circumstances,their energy expenditures woulddecrease as a result of more efficientinstallations and/or fuel switching.

Based on this analysis, as well as twosmaller surveys undertaken within repre-sentative urban areas, the study foundthat the vulnerable strata to energy priceincreases include:

• The general low-income group:welfare beneficiaries, households headedby unemployed adults, households withseveral children, and families whodepend on agriculture for all theirincome;

• Families who are at risk byvirtue of their housing circumstances,mainly pensioners and families withyoung children. In their case, the emer-gence of energy poverty can be attrib-uted, in part, to the poor energy efficien-cy of the home, and above-average dailyenergy needs.

Due to its contingency on a wide setof housing and social conditions, beyondsimply low income, energy poverty isboth a lower and middle-class phenome-non in Macedonia.

Czech Republic: Concen�trated Patterns of Deprivation

In the Czech Republic, the implemen-tation of energy reforms has resulted inthe formal breaking up of the electricitymonopoly. The state-owned CzechElectricity Company (CEZ) operates10TW of generation capacity, mainlynuclear and coal-based. The high-voltagegrid is run by a fully owned subsidiary ofCEZ, while the distribution network isdivided among eight regional electricitycompanies. Ownership of district heatingnetwork ranges from municipally ownedto entirely private; the national gas trans-mission system is wholly owned andoperated by a multinational energy com-pany, which also maintains a dominantshare in most gas distribution enterprises.

The country has been a leader inenergy efficiency among transition coun-

tries, having established a wide range ofcapital investment programs. However,relative to other policies, energy efficien-cy support has been underfunded and itsadministration fragmented across severalgovernment departments.

In the housing sector, the state hasattempted to use rent control as anacross-the-board social protectionmechanism. This has created an incon-gruous combination of below-marketrent levels and distorted tenant-ownerrelations, which has negative effects onthe maintenance — and, hence, energyefficiency — of the housing stock, aswell as the spatial mobility of house-holds.

Price rises in the Czech Republichave been far less dramatic in relativeterms compared with Macedonia.Moreover, the country has a morediverse fuel mix in the residential sectorcompared to Macedonia. Gas stands forapproximately 40% of total energy,with the remaining 50% split almostequally between electricity and heat.

The compensating variation analysisfor the period 1995—2004 (see Table)indicates that Czech households haveresponded to energy price increases inone of three ways.

• The bottom decile hasdecreased its energy expenditure by 6%of monetary income, a sign of energypoverty. Indeed, the surveys of well-being have established that 8.2% ofhouseholds are not satisfied with thelevel of heating in their homes.

• Deciles 2—6 have seen a rela-tive rise in their energy expenditure,reaching as much as 49% in the thirddecile. Although this increase is proba-bly related to the rapid growth of ener-gy prices since 1995, the householdsmay have allocated additional incomefor energy.

• The energy expenditures of thetop four deciles have actually fallensince 1995, most likely due to the avail-ability of cheaper and/or more efficientfuels, coupled with the improved tech-

nical quality of the residential stock.Clearly, the Czech Republic has a

more concentrated demographic struc-ture of energy poverty, encompassingup to 10% of the population. Singleparents, households with several chil-dren, and pensioners appear to be mostvulnerable to energy poverty. Based onthe available evidence, it can be con-cluded that the income dimension ofenergy poverty is stronger in the CzechRepublic than in Macedonia, althoughhousing infrastructures also play a role,especially in the case of pensioners.

ConclusionsA significant number of households

in Macedonia and, to a lesser extent, inthe Czech Republic, may be living inenergy poverty, an emergent form ofdomestic energy deprivation in the post-socialist world. The problem may haveextensive socio-economic ramificationsacross the region, as transition coun-tries, while being located in cold cli-mates, have been subject to energy priceand income shocks, inefficient energyuse, lack of policy co-ordination, anddecaying infrastructures.

The reviewed evidence connectsenergy poverty to the poor co-ordina-tion of energy, welfare, and housingpolicies in the relevant governmentdepartments. One of the main problemsin this regard stems from the policy-makers' failure to perceive problems ofsocial policy transformation, energyefficiency, poverty, and affordability inan integrated manner. The rise ofdomestic energy deprivation alsoappears to be related to the lack of acomprehensive system for domesticenergy efficiency support in both coun-tries.

Stefan Buzar is a Senior ResearchAssociate of the School of Geography, OxfordUniversity, Centre for the Environment, andExternal Professor at the Department ofEconomic Geography, Gdynia, Poland. BT


Decile I II III IV V VI VII VIII IX XMacedonia 6.1% �2.7% �48.6% �44.4% �13.9% �10.4% 18.0% 25.3% 14.8% 2.3%Czech Republic 26.8% 13.9% 9.3% 6.4% 3.8% 1.1% �0.1% �2.5% �0.7% �6.0%

Note: Author's calculations of the compensating variation values between 1995 and 2004, per equivalent income decile, are calculated based ondata from the Household Expenditure Survey (Macedonia), and Family Budget Survey (Czech Republic).

Energy Expenditures of Households per Income Decile

· 17


Jens Arnold, Beata S. Javorcik and Aaditya Mattoo

While there is considerable empiricalevidence on the impact of liberalizingtrade in goods, the effects of services lib-eralization have not been empiricallyestablished. Services such as telecommu-nications, finance, consulting, insurance,or transport are an essential part of awide range of manufacturing and servic-es industries. Large gains could poten-tially be achieved in the quality andavailability of services through the liber-alization of service sectors. Given thelimited scope for using cross-bordertrade to substitute for domestically pro-duced services inputs, one would expectthe performance of downstream sectorsto be tied more directly to the qualityand availability of services supplied byproviders operating domestically than isthe case for physical intermediate inputs.The results of our study, based ondetailed firm level information, suggest apositive association between the extentof policy reform in services industriesand the productivity of the manufactur-ing sectors using services inputs.

The Czech Republic introduced farreaching service industry reforms includ-ing opening the sector to foreign

investors. During 1998 — 2003, inflowsof foreign direct investment (FDI) intoCzech service sectors have consistentlybeen higher than inflows into manufac-turing industries (see Figure 1).

By inducing the entry of new domes-tic or foreign providers, the liberaliza-tion of service industries is likely toincrease the choice of providers fordownstream users of services. This mayimprove the quality of services availableto firms. For instance, internationalphone communications or electricityprovision may become more reliable dueto investment in infrastructure by newdomestic owners or foreign sharehold-ers, or credit decisions may be madefaster as competition among banksincreases. This will in turn limit disrup-tions to production and decrease theoperating costs in downstream manu-facturing sectors.

Additionally, new services maybecome available with the introductionof international best practice. Examplesinclude new financial instruments andcash flow management tools, multi-modal transport services, or digitalvalue-added services in telecommunica-

tions. The availability of such servicesmay allow manufacturers to introduceproductivity-enhancing changes to theiroperations, such as receiving productionorders online or setting up online bid-ding systems for suppliers.

The entry of foreign providers mayplay a particularly important role.Foreign providers can bring know-howand knowledge about new products andinternational best practice into thecountry. By setting a higher standardand introducing new products, theymay also induce domestic suppliers tomake similar improvements. A largeAustrian-owned bank, for example, wasthe first bank to offer remote bankingservices via phone or internet, and70,000 Czech customers signed up forthe new service within the first twomonths. The service now has about800,000 users and other banks havestarted to offer similar services.

In telecommunications, the CzechRepublic was lagging behind all its west-ern European neighbors with respect tothe use of cellular phones in 1998, whichis the first year considered in our analysis.By 2003, however, it was second only toItaly and Sweden with respect to the num-ber of cell phones per 100 inhabitants.

Liberalization ImprovedQuality, Affordability andAvailability of Services

The potential positive effect of liber-alization and foreign presence in servicessectors is reflected in the results of a firmsurvey conducted by the World Bank inthe Czech Republic in 2004. A majorityof the 350 Czech enterprises interviewedbelieved that the liberalization of serviceindustries contributed to improvementsin the quality, range and availability ofservice inputs in their country. Figure 2shows the perceptions of Czech firmswith respect to the liberalization of thetelecommunications sector. Similarresults (not reported here) were obtained

Restrictions on foreign presence in services industries can dampen the productivity growth in manu�facturing industries

The Productivity Effects of ServicesLiberalization in the Czech Republic

Figure 1. FDI Inflows into the Czech Republic 1998 — 2002 (Millions of Euros)

Source: Czech National Bank

Manufacturing Services

1998 1999 2000 2001 2002

8000

7000

6000

5000

4000

3000

2000

1000

0

·18 New Findings

for banking, accounting, insurance, andtransport services.

A closer look at service industries inthe Czech Republic reveals substantialdifferences between domestic and for-eign-owned services providers. Foreign-owned providers exhibit higher laborproductivity than their domestic coun-terparts and have a higher propensity to

invest. The data also documents increas-es in productivity and investment takingplace following foreign acquisitions ofCzech services firms. Moreover, the datashow that following a foreign acquisi-tion, target firms experience an increasein their market share, indicating arevealed consumer preference for theservices provided by foreign-ownedcompanies.

To examine the link between servicesector reforms and the performance ofservices users this study tests the relianceof each manufacturing sector on eachservice sector, assessed on the basis of thenational input-output matrix, as aweight to reveal manufacturing sectors'exposure to services reform. Theseweights are then used to relate total fac-tor productivity in manufacturing firmsto the state of liberalization in servicesectors. The analysis is based on firmlevel data from Amadeus, a commercialdata base including financial statementsand ownership information for approxi-mately 10,000 Czech companies for theperiod 1998 — 2003.

The study uses several proxies to cap-ture the extent of liberalization in servicesectors. The first measure is a set of pol-icy reform indices published by theEuropean Bank forReconstruction andDevelopment. Time-vary-ing indices are availablefor banking, telecommuni-cations, electric power,railway transport, roadtransport and water distri-bution. The indices reflectthe overall state of policyreform in a given serviceindustry. The other meas-ures capture particularaspects of liberalization: (i)

the extent to which foreign investorshave entered Czech service industries,proxied by the share of an industry'soutput produced by foreign-owned com-panies; (ii) the progress of privatizationin service industries, proxied by the shareof an industry's output produced by pri-vate companies; (iii) the level of competi-tion in service industries, measured by

the market share of the four largestproviders.

In addition to proxies for services lib-eralization, the empirical analysisincludes a comprehensive set of controlsfor other channels through whichincreased openness may affect firm per-formance. In particular, we control forthe availability of material inputs provid-ed by foreign-owned companies operat-ing in upstream manufacturing sectorsand for tariffs on imported intermediateinputs. To capture the level of competi-tion in the output market, we control forforeign presence and tariff protection inthe same sector. The empirical specifica-tion further includes firm fixed effectswhich control for unobserved firm het-erogeneity and capture time-invarianteffects specific to the industry and theregion in which a firm operates.

Foreign Presence inServices Positive forManufacturing Productivity

The results demonstrate a positivecorrelation between liberalization inservice sectors and the productivity ofmanufacturing firms relying on servicesinputs. A positive and statistically signif-

icant relationship is found for the policyreform index, the presence of foreignproviders in services sectors and theextent of privatization in service indus-tries. The relationship between the pres-ence of foreign providers in service sec-tors and the performance of manufac-turing firms relying on services inputs isthe most robust, suggesting that openingservice sectors to foreign providers maybe a key channel through which servicereforms affect downstream productivityin manufacturing. The results consis-tently show an association between serv-ice sector liberalization, and in particu-lar FDI inflows into these sectors, andthe improved availability, range andquality of services, which in turn con-tribute to improved performance ofmanufacturing firms using services asinputs.

As reflected in recent policy debates inthe European Union and the World TradeOrganization, the liberalization of servicesectors has been a highly controversialsubject. Most of the barriers to foreigninvestment today are not in goods but inservices, reflecting the unwillingness ofgovernments, particularly in developingcountries, to allow unrestricted foreignpresence in what they believe are "strate-gic" sectors. Our analysis suggests thatsuch restrictions on foreign presence inproducer services can seriously dampenthe growth of productivity in down-stream manufacturing industries.

Jens Arnold is Consultant, Beata S.Javorcik is a Senior Economist, and AadityaMattoo is Lead Economist, in theDevelopment Economics Research Group ofthe World Bank, 1818 H Street, NW; MSNMC3-303; Washington, DC, 20433. The arti-cle is based on the authors' joint paper forth-coming as World Bank Policy ResearchWorking Paper. BT

Policy reforms, the presence of foreign service providers and theextent of privatization in the service sector are correlated with eachother

Figure 2. Firm Perceptions about Service Reforms in the Czech Republic Perceived Impact of Liberalization of Telecommunications Sector on:

Source: World Bank

Prices Quality Range of Services Offered Availability of Services

Positive

Negative

No effect

Positive

Negative

No effect

Positive

Negative

No effect

Positive

Negative

No effect


· 19


The Media's Effect on CorporateGovernance in Russia

Alexander Dyck, Natalia Volchkova and Luigi Zingales

The coverage of a corporate governance abuse in the Anglo�American press affects the probabilityof the company changing its behavior

In two Russian companies, Sidancoin the oil and gas sector and MGTS intelecommunications, large shareholdersattempted to dilute other shareholdersby issuing shares below the marketprice to insiders. The oil company'sactions received significant coverage inthe international business press, andlater the Security Market FederalCommision canceled the share issue.The telecom company received muchless media attention, and the issue sub-sequently went through. Can mediareporting indeed trigger a change ofaction?

The media can matter in cases of cor-porate governance violations by affect-ing the reputation of the partiesinvolved. This is an effective constraintonly if the audience that we care aboutfor our reputation becomes informed.Very often, however, the relevant audi-ence does not find it in its interest to col-lect information about the behavior ofcorporate managers and/or politicians,unless this information is not costly toobtain or it is packaged in a way thatmakes it entertaining. Only when thisoccurs do corporate managers find itworthwhile to develop a reputation ofacting in the interests of shareholders.The same is also true for the regulatorswho are supposed to enforce corporategovernance rules: they are more likely toenforce these rules when they know alarge audience is watching.

The data on Russia is very suitablefor studying the media's effect on corpo-rate governance. First, during the late1990s corporate governance abuses inRussia were very extreme, very common,and very visible. Second, in Russia thestandard mechanisms to redress theseabuses were either non-existent or com-pletely ineffective (for example, corrupt-ible courts), which allows us to identifywhether media had an independent effecton outcomes. Third, and most impor-tant, in Russia there exists an investment

fund, the Hermitage Fund, that con-sciously employs a strategy for using themedia, which allows us to test whetherthe effect of the media is causal.

Founded in 1996 as a generic hedgefund with a Russian focus, theHermitage Fund found itself drawn intocorporate governance battles. As thelargest foreign investor in Russian equi-ties, it could not remain passive in frontof major corporate governance abuses.With weak legal remedies at its disposi-

tion, to protect its investments the Fundchose to actively shame Russian compa-nies in the international press, hoping tohurt their reputation and that of the gov-ernment officials who regulated thesefirms. But the Hermitage Fund has anincentive to act only for companies itowns shares in.

A case study of the two companiesmentioned above is quite illustrative ofthe relation between the Hermitage Fundand press coverage. While in both largeshareholders attempted to dilute othershareholders, the companies differed inowners: Hermitage had a significant stakein Sidanco, and no stake in MGTS. Wefind that Sidanco's actions were reportedin 23 news articles, 14 of which were incredible international publications (9 inthe Financial Times, 4 in various editionsof the Wall Street Journal and 1 in TheEconomist). By contrast, MGTS had only3 articles in credible international press(all in the Financial Times). In the Sidancocase, the dilution was reversed, in MGTSit went through quickly.

Out of 57 Violations, 17Redressed

We took an initial sample of 250potential corporate governance viola-

tions between 1998 and 2002 fromdescriptions of events published in a cor-porate governance weekly by TroikaDialog, a prominent Russian investmentbank. We have only focused on thoseevents that had the potential to signifi-cantly harm the interests of minorityshareholders, and where the proposedaction could, in principle, be limitedthrough actions by minority sharehold-ers and allies, leaving us with 57 events.For 24 of these, for which we have reli-

able stock price data, we confirm thecorrectness of our assessment by thestock price reaction. To the extent thatthe corporate violation is a surprise, itshould have a negative impact on stockprices. Indeed, the response was over-whelmingly negative, with a meandecline in cumulative excess returns of15.3%. As for the actual outcomes, therewas a positive outcome in terms of a sig-nificant redress or partial redress in 17 ofthese 57 cases.

Foreign Press CoverageHas an Effect

The first question we address iswhether press coverage has any impacton the probability that a corporate gov-ernance violation is partially or com-pletely redressed.

In a country where legal remedies arenot available, the only source of leverageagainst these violations is internationalreputation, which we try to capturethrough three proxies:

• The percentage of foreign own-ership in the firm;

• The presence of the EuropeanBank of Reconstruction and Develop-ment (EBRD) among the company'slenders;

In Russia, there exists an investment fund, the Hermitage Fund,that consciously employs a media strategy

·20 New Findings

• The number of joint venturesbetween a company and foreign part-ners. Of these, only the presence of theEBRD as a creditor has a significantimpact on outcome, increasing the prob-ability of full redress by 18 percentagepoints.

• When adding a measure of for-eign press coverage (number of articlespublished in the Financial Times (FT) andWall Street Journal (WSJ) in the twomonths following a violation) to thebasic specification, press coverage has apositive and statistically significant effect.One standard deviation increase in thenumber of articles published in foreignnewspapers increases the probability offull redress by 10 percentage points.

Publication in WSJ seems to havemore impact: one standard deviationincrease in the number of WSJ articlesincreases the probability of a good out-come by 10 percentage points versus 1percentage point for FT articles. News-papers in Russian, even when credible, donot seem to play much of a role. Hence,we infer that the main source of leverageis the access to an international audience.

The presence of the Hermitage Fundamong the shareholders more thantriples the average coverage and empha-sizes the causality of the effect — mediacoverage has a direct effect on corporategovernance.

Media Pressure Leads aRegulator to Intervene

What are the main mechanismsthrough which the press could have aneffect? When grouping the positive out-

comes according to the main forcebehind a reversal, we find that:

• Roughly 30% of the cases reach(at least partially) a positive outcome asa result of the intervention of a regulator.What does press coverage have to dowith the decision of a regulator to inter-vene? By overcoming ignorance presscoverage makes more people aware ofthe issues involved, increasing the repu-tation costs of non-action.

• Another 18% of the cases getresolved because of political interven-tion. In a typical democracy, politicianswould feel compelled to intervene onhighly visible issues because their politi-

cal reputation is at stake. In Russia theimportant factor is the reputation vis-a-vis foreign, in particular Anglo-American, investors.

• In another 24% of the cases, amore positive resolution is due to thefact that press coverage strengthened thealready existing opposition. For exam-ple, in the truck maker KamAZ case, theEBRD was fighting the share dilutionapproved by the company. Press cover-age strengthened the EBRD case becauseit increased the awareness of investorsand in so doing increased the reputationcost of misbehavior.

• In the remaining 24% of thecases, it looks like the company voluntar-ily changed its course of actions, and it ismore difficult to establish media's role.

In sum, it looks like the primarymechanism through which media cover-age has an effect is by increasing the rep-utation cost of misbehavior vis-a-vis arelevant audience (in this case Anglo-American investors). Obviously, the suc-cess of the strategy is highly dependenton the importance the key actors attrib-ute to their reputation in regard to thisaudience. Thus, our findings might becontingent to the particular periodRussia was living through shortly afterthe default on its public debt, when itwas particularly concerned with restor-ing its international credibility.

Thus, by interacting with developing

countries the developed countries canexert a positive influence not only in pub-lic governance, but also in corporate gov-ernance. Since politicians and business-men are eager to "look good" in Anglo-American public opinion, they can be lev-ered into improving their governancestandards.

Alexander Dyck is Professor at Universityof Toronto, Canada; Natalia Volchkova is aSenior Economist at CEFIR, Moscow, andLuigi Zingales is Professor at GraduateSchool of Business of University of Chicago.The article draws on the authors' paper "Thecorporate governance role of the media: evi-dence from Russia", which was presented atthe European Financial Association's confer-ence held in Moscow in August 2005. BT

Publications on corporate governance abuses in the Wall StreetJournal have more impact compared to other media outlets

The literature identifies several related channels:• Increased access to external financing by firms,

which can lead to greater investment, higher growth, andmore employment creation. Financial and capital marketsare better developed in countries with strong protection ofproperty rights.

• Lower cost of capital and associated higher firmvaluation, which makes more investments attractive toinvestors and leads to growth and employment. Outsidersare less willing to provide financing and more likely tocharge higher rates if they are less assured that they willearn an adequate rate of return.

• Better operational performance, through more effi-cient management, better asset allocation, better labor poli-cies, or similar efficiency improvements, which creates wealth.

• Reduced risk of financial crises, a particularlyimportant effect, as financial crises can impose large eco-nomic and social costs. During the East Asian financial cri-sis, cumulative stock returns of firms in which managers hadhigh levels of control rights but little direct ownership were10 — 20 percentage points lower than those of other firms.

• Better relationships with all stakeholders, includingbanks, bondholders, labor, and local and national govern-ments. Each of these groups monitors, disciplines, moti-vates, and affects management and the firm in various ways.This helps improve social and labor relationships and areassuch as environmental protection.

Source: Stijn Claessens, “Corporate Governance and Develop-ment”, http://www.gcgf.org/ifcext/cgf.nsf/Content/Reports BT


Corporate Governance, Growth and Development

· 21


Is there a "Glass Ceiling" in theCzech Republic?

Stepan Jurajda and Teodora Paligorova

There is growing evidence that in theCzech Republic women face a "glassceiling" — a barrier to career prospects,which precludes them from achievinghigh-paying positions and having equalwages with men especially in the upperpart of the wage distribution. Analysis ofmanagerial gender gaps is particularlysignificant in the post-communisteconomies of Central Europe, wherefirm personnel strategies and corporategovernance are converging towardsWestern standards.

Our study of Czech managerialemployees covers not only top execu-tives, but also mid-level managers andemployees, thereby allowing us to linkthe relative position of women acrossfirm hierarchy levels. We classify chiefexecutives and directors as top-levelmanagers, and production and specialistmanagers and supervisors as lower-levelmanagers. We use data from a nationalemployer survey, the Information Systemon Average Earnings, from 2000 to2004. We work with salary informationonly, as data on total compensation isnot available. The data do not coverthe public sector (education, healthand public administration), wherewage determination follows budgetaryrules and is based on wage grids. Inour analysis we focus only on largefirms with more than 250 workers.The total sample includes wagerecords of 1,692 top-level managersand over 36,000 lower-level man-agers.

Lowest Gender WageGap in State Firms

Top-level managers in our datamake on average 2.69 times more perhour than lower-level managers who,in turn, enjoy wage rates 2.46 timeshigher compared to those of ordinaryemployees. How well are women rep-resented among these high-paidgroups of workers? If the gender of

managers was assigned randomly in afashion reflecting the overall employ-ment patterns, the share of female man-agers would be around 46%. In contrast,our data show that only 7% of top man-agers are females, while women consti-tute 32% of all lower-level managers.Female top-level managers make onaverage 41% less per hour than theirmale equivalents, while the gender wagegap of ordinary employees is 22%.

Women are relatively highly repre-sented among younger and especially

among less educated top managers —though these groups of managers arealso the least highly paid. Among lower-level managers, the wage gap is smallamong highly educated people, thoughin this group there are also relatively fewwomen. The representation of womenand the gender wage gap are more equal-ized among ordinary employees.

In looking at patterns of employmentand wages across firm ownership types,sizes, and industrial sectors we find thatstate-owned firms have the lowest gen-der pay gap and more women also fea-ture at the top of the firm hierarchy.Dividing firms into four quartiles by size(total employment) demonstrates thatfemales are more likely to be at the topof the few very large firms. Finally, the"femaleness" of the top brass is highestin the relatively low-paying retail andtransport and communication industries,

where 38% of all female executiveswork. The gender wage gap for top man-agers fluctuates across all industrybranches, but is particularly high in theretail industry.

Shifting attention to lower-level man-agers, female representation in the man-agerial workforce is highest in state-owned and very large firms, similar to

the case with top-level managers. Thegender wage gap is relatively moreequalized across firm types comparedto the higher level positions, andagain, the retail and transport indus-tries have the highest share of women.

Thus, at 7% women are severelyunder-represented in top managerialpositions, and there is a clear genderdivide between lower and top-levelmanagerial ranks. The fact that theaverage pay gap between men andwomen increases with firm hierarchylevel suggests an increasingly female-unfriendly environment as workersprogress towards higher levels.

Can We Account for theSources of the Wage Gap?

To what extent can the genderwage gaps be explained by the genderemployment patterns and differences

Of Czech executives only 7% are women, and they earn 20% less than their male counterparts

A cross-country comparison of the rela-tive gender employment among managers oflarge firms (occupation group 12 of theISCO-88 classification), using data fromhousehold surveys harmonized in theLuxembourg Income Study, shows that theshare of female managers of large firmsvaries widely from 17% in Belgium to 43%in the USA. The hourly pay gap, defined asthe ratio of female to male average wagesminus one is high in Russia, Spain, and theU.S., and the smallest for Ireland andSlovenia. In the Czech Republic females con-stitute only about 23% of the ISCO group12 of corporate managers and the corre-sponding gender pay gap, at 24%, is thenclose to the average gap of this sample ofcountries.

Stepan Jurajda, Teodora Paligorova, "Femalemanagers and their wages in Central Europe"

State�owned firms have the lowest gender wage gap and morewomen at the top of the firm hierarchy

·22 New Findings

in demographic characteristics of man-agers?

Using the traditional Oaxaca-Blindertechnique, we find that approximately athird of the gender wage gap for bothtop and lower-level managers can beexplained by the gender differences inage and education. This is in contrast tothe situation with ordinary employees,where the demographic composition ofthe workforce is actually more favorablefor women. We also find that femalemanagers, both at top and lower-levelsare more often found in less "generous"firms. Yet, the analysis suggests the pres-ence of a sizeable "unexplained" compo-

nent of the managerial gender wage gap.Using matching decomposition tech-niques, we find that this "unexplained"wage gap (for men and women compa-rable in terms of demographics andemployer type) is about 20% in eachemployee group; this includes both typesof managerial posts as well as ordinaryemployees.

Next, we link the relative position ofwomen across our three firm hierarchylevels. We find that there is a statisticallystrong positive link at the firm levelbetween the fraction of women at allthree hierarchy levels, and a negative linkbetween the gender wage gap at a givenhierarchy level and the presence ofwomen at other levels. These results arein accord with those Bell (2005) reportsfor the U.S.; they are consistent withCzech firms differing in a systematic way(within industry and size categories) inhow friendly they are to women. Theestimates particularly support the notion

that lower-level managers are promotedfrom among the employees.

Putting the Czech GlassCeiling into InternationalPerspective

In order to compare the Czech mana-gerial gender gap to the U.S. one (specif-ically, to the Bertrand and Hallock 2001study), we examine the five highest-paidmanagerial employees from each firm ina sample.

The share of females among the fivehighest-paid managers in each of theCzech firms in our sample is 9%, which

compares favorably to the recent 6% inthe U.S. The ratio of female to male payamong the Czech managers is 74%,which is comparable to the 73% ratio forthe U.S. However, the U.S. gap, based noton salary but on total compensation, islarger at 67%. Comparing the combinedgroup of top and lower-level Czech man-agers to the U.S. ones, the Czech rawwage gap appears about a third smaller.

How does the structure of the Czechwage gap for the highest-paid managerscompare to that estimated in the U.S.?About a fifth of the Czech gap can beaccounted for by the lower participa-tion of women in higher-paying firms,compared to about a third in the U.S. Inthe Czech Republic, 74% of the fivehighest-paid female managers work inthe smallest firms. The occupationalstructure of female managerial employ-ment explains a substantial part of theoverall gender compensation differen-tial in both economies. Unfortunately,

the Czech data do not allow us to fullyidentify the CEO, which may be one ofthe reasons why the Czech "unex-plained" gap remains higher than theU.S. one.

Overall, we find the relative positionof women at the top of U.S. and Czechfirms quite similar. We also conclude thatthe size of the Czech gender wage gapthat cannot be linked to observable dif-ferences between men and women andtheir employers is quite similar acrossfirm hierarchies. To the extent that thisconditional wage gap can be interpretedas on-the-job discriminatory wage set-ting, this suggests that women are treatedsimilarly at the top and bottom of firms,once they are there. A large part of theaverage wage difference across gendersamong top managers is related to the dif-ferent types of firms that women andmen typically head: female employeestend not to be present at the top of thehighest-paying companies. The policyimplication of these findings is thatequality-enhancing policies aimed at thehighly visible group of executives aremore likely to be effective in equalizingwages of male and female top managersif they focus on promotion policies in themost prestigious companies.

Stepan Jurajda is the Deputy Director forResearch and Associate Professor at CERGE-EI, Prague. Teodora Paligorova is JuniorResearcher and a Ph.D. student at CERGE-EI. The full text of the paper "Female man-agers and their wages in Central Europe" canbe accessed at: http://www.cergeei.cz/pdf/wp/Wp296.pdf. This research was part of theEU Equal project "Fifty-Fifty: EqualOpportunities for Women and Men" and wasco-financed by the European Social Fund ofthe EU and the state budget of the CzechRepublic. BT

Among the five highest�paid managers in Czech firms there are9% females, who are paid 74% of their male counterparts’ wages

Female Legislators, Senior Officials and Managers (% of total) in Some Countries

Country % Country % Country %

Philippines 58 Germany 36 Bulgaria 30Fiji 51 Hungary 34 Georgia 28Tanzania 49 Poland 34 Czech Republic 26United States 46 United Kingdom 33 Hong Kong, China (SAR) 26Latvia 40 Slovenia 33 Japan 10Moldova 40 Romania 31 Turkey 6Russian Federation 39 Mongolia 30 Pakistan 2

Note: Data refer to the most recent year available during the period 1992 — 2003.Source: calculated on the basis of occupational data from ILO (International Labour Organization) 2005.http://hdr.undp.org/statistics/data/indicators.cfm?x=240&y=2&z=1


· 23


Foreign Ownership vs. ProductionEfficiency

Valentin Zelenyuk

There is little doubt among econo-mists that in most industries, on aver-age, private companies should outper-form state-owned ones. The situationregarding foreign vs. local ownership,however, is not so clear. Does the advan-tage of one over the other depend on thetype of industry? Indeed, differentindustries might have different levels ofadaptability (e.g. due to local culture)for foreign firms. On the other hand,advanced technologies brought by for-eigners can also have different levels ofabsorption and rates of diffusion bylocal companies.

We examine the issue by conductingan efficiency analysis for China andUkraine, following a two-step methodol-ogy. At first we estimate efficiency scoresfor each province/region in each type ofindustry then we analyze these individ-ual efficiency scores.

Ukrainian Firms MoreEfficient Than Foreign Ones

In Ukraine, the analysis using firm-level data produced quite an intriguingresult: purely domestic private firmstended to be more efficient than the firmswith foreign ownership. Because of thesmall sample size for each industry wedid not examine the question whetherthis difference in the efficiency of foreign

and domestic firms was characteristic ofall industries or only some of them.

In the study of Chinese enterprises,we used the most recent aggregate own-ership data for 29 provinces. The results,firstly, confirmed that non-state owner-ship was superior to state ownership. Wealso found evidence of a pronouncedagglomeration effect in light industry,but not in heavy industry. Furthermore,foreign ownership performed distinctive-

ly better than all other types — but onlyin the case of heavy industry. Most inter-estingly, our results for China clearlyshow that foreign ownership in lightindustry appeared to be less efficient, onaverage, than private ownership. TheUkrainian data confirmed a similar ten-dency: namely, domestic firms tended tooutperform, on average, their foreigncompetitors in light industry, but not inheavy industry.

What are the likely reasons behindthese somewhat unexpected results?Further analysis and discussions withpractitioners clarified the phenomenonand provided support for the theory oftechnology diffusion/adoption. The

point is not whether the industryis "light" or "heavy" but howcapital intensive it is. Heavyindustry, on average, is more capi-tal intensive and so the purchaseof newer technology and its adop-tion requires larger financing thanin light industry. As a result, for-eign investors in such industries —which are usually the giganticmultinational corporations — arelikely to have an advantage overthe local firms in bringing moreadvanced capital and expensivetechnologies, which leads them tooutperform local firms.

On the other hand, even when for-eigners have initial technological andcapital advantages, local private firmsshould be able to absorb, adopt andadapt technologies to local specifics eas-ier and faster in light industry than inheavy. Moreover, because light industrytends to be more labor intensive com-pared to heavy industry, its performanceis likely to be more dependent on thelocal culture, traditions, habits, etc. This

gives an advantage to the local firmswhich, given similar levels of technologyadoption, can make them more efficientthan the foreign ones.

Therefore, it is possible that in Chinaand Ukraine the flow of foreign invest-ments might slow down in (or even bediverted from) light industry, where somelocals are already outperforming foreign-ers. Meanwhile, new foreign investmentwill continue to flow into more capital-intensive industries, where foreigners canenjoy their technological and capitaladvantages for a long time. A policy recommendation for the transitionalcountries, therefore, would be to promoteeducation aimed at human capital devel-opment primarily oriented at the capital-intensive industries, especially the high-tech industries, which will help toincrease the speed of technology adop-tion and diffusion in these industries.

Valentin Zelenuk is a Senior Economist atKyiv Economic Institute and Director ofUkrainian Productivity and Efficiency Groupat EERC-Kyiv at the National University"Kyiv-Mohyla Academy, Ukraine", e-mail:[email protected]. The article summa-rizes research on China and Ukraine by V. Zelenuk and his co-authors; see theauthors’ papers in the Bibliography at the endof the volume. BT

In China and Ukraine, private domestic firms in some industries are catching up with foreign com�petitors and are even outperforming them

Firms in light industry, which tend to be more labor intensive andreliant on local culture, outperform foreign firms

·24 New Findings

Russia and the WTO: The "Gravity"of Outsider Status

Bogdan Lissovolik and Yaroslav Lissovolik

Russia's accession to the WTO hasemerged as a key step for further market-oriented reform. On the one hand, thisaccession could harmonize Russia'sdomestic legislation and practices withthose of its major trading partners. On theother, it would remove the main remain-ing obstacles to Russia's exports to WTOmembers, amplifying the substantial gainsfrom trade that Russia has already beenable to generate. The unused potential forfurther trade reorientation is illustrated bythe fact that Russia's exports to the WTOaccounted for "only" about 80% of itstotal exports in 2002, compared with the95% share of WTO members in worldtrade. Furthermore, the share of Russia'sexports to WTO countries that becamemembers of the organization in 1995hardly changed during 1995 — 2002, withthe growth in the share of exports directedto all WTO countries largely accountedfor by the increase in WTO membership.

However, despite these argumentsand the proclamation of WTO entry asRussia's key policy priority, the debateon the benefits of Russia's membershiphas become more ambiguous lately, caus-ing substantial delays in the already pro-tracted accession process. Domesticopponents of Russia's WTO entry haveargued that additional gains from mem-bership would be limited, since the coun-try already enjoys most favored nation(MFN) status with many WTO mem-bers, and some advanced countries haveaccorded preferential treatment toRussia under the Generalized System ofPreferences. A careful assessment of theaccession benefits for trade, particularlyexports, would be important for under-standing this debate.

To shed light on the factors behindRussia's export performance, we applythe gravity model to gauge whether the"outsider" status has been affectingRussia's export structure. The data setspans a period of eight years from 1995to 2002 and encompasses 171 countries,most of which are WTO members,including the recent entrants.

The main result of our analysis is thatthe structure of Russia's trade remains insome sense "suboptimal" or "different"compared with the benchmark offered bythe model, in that it trades "too little"with the WTO members and/or "toomuch" with non-WTO members. Thismay not seem surprising, given that manynon-WTO members are former socialisteconomies, with significant historical andsystemic ties with Russia. However, theseresults are somewhat surprising, since we

control for these specificities through var-ious regional dummy variables.

Why does the structure of Russia'strade differ from that suggested by thegravity model? Clearly, various factorscould account for Russia's particulartrading pattern, ranging from statisticaland historical reasons to more substan-tive economic and policy issues. Two fac-tors come out as plausible from ourempirical analysis. First, Russia's exportsmay be constrained by restrictionsimposed by its WTO trading partners,either because these do not enjoy the fullbenefits from the trade liberalizationrounds, or owing to barriers-formal orinformal-levied by individual WTOmembers. WTO member countries mayimpose these barriers on nonmembersmore readily than on members, becausethe former cannot retaliate, because theydo not belong to the WTO's dispute set-tlement bodies, or for other reasons.

Second, the export pattern may havebeen influenced by Russia's domesticexport restrictions. While most ofRussia's export duties were graduallydropped by mid 1996, some duties wereintroduced or reintroduced in 1999 —2000. There is at least some evidencepointing to the role of these domesticexport restrictions: the significance ofthe WTO variable becomes much lowerin 1997 and essentially breaks down in

1998, when domestic export restrictionswere minimal.

Other plausible factors, such asRussia's exceptionally good bargainingposition vis-a-vis some non-WTO mem-bers, do not come out as very significant.

The numerical coefficients in ourregressions imply that, in the long run,Russia's exports to WTO members couldexpand by a very large amount — around50%. A major issue is the extent to whichthis correction of trade diversion would

occur through export expansion asopposed to reorientation. In all likeli-hood, both expansion and substitutioneffects would be present. In particular, ifthe economic reasons for our underlyingresults are trade restrictions of any type,it is unlikely that the trade-off betweenexportables and non-traded goods wouldbe unaffected after the restrictions onexports have been relaxed.

Thus, entering the WTO appears tobe the most logical way to address anunderlying bias in Russia's trade struc-ture. Regarding current trade policy,Russia should, through WTO member-ship, benefit from a stronger focus onensuring uniformity and a level playingfield across regional trading patterns.The sheer size and diversity of the coun-try favor trade integration via WTOmembership rather than through region-al arrangements. Also, Russia's entrywould make the WTO nearly universal,thereby possibly giving a multilateralboost to global trade.

Bogdan Lissovolik is a Senior Economistin the European Department of the IMF,Washington, DC. Yaroslav Lissovolik is aChief Economist with United FinancialGroup in Moscow. See the full paper at:http://www.imf.org/External/Pubs/FT/staffp/2006/01/pdf/lissovol.pdf, IMF Staff PapersVol. 53, No.1. BT

Upon entering the WTO, Russia's exports to its members could expand by up to 50% in the long run

Russia currently trades “too little” with the WTO members and “toomuch” with non�WTO members


· 25Agenda


Third International Conference onConditional Cash Transfers

As a follow-up to previous conferences, the World Bank andthe Government of Turkey are cosponsoring the ThirdInternational Conference on Conditional Cash Transfers on June26 — 30 in Istanbul, with support from several donors. The goalis to share experience and knowledge between countries on whatworks and what does not work, both from a policy and an oper-ational perspective. Conditional Cash Transfer programs pro-vide money to poor people conditional on them investing in theirchildren's human capital, for example, ensuring they attendschool or receive regular medical check-ups and get vaccinated.Such programs are relatively new, but have been adopted alreadyin a number of countries. Evaluation results from the first gen-eration of programs show them to be effective in promotinghuman capital accumulation among poor households. There isclear evidence of success in increasing enrollment rates, improv-ing preventive health care, and raising household consumption,but there are also concerns that must be addressed.

World Bank Moves Ahead with PartnershipStrategies for Soon�to�Be EU Member States

The World Bank's Board of Executive Directors discussedCountry Partnership Strategies (CPS) for Bulgaria and Romaniaon June 13. The strategies cover the period 2006 — 2009, dur-ing which both countries plan to join the European Union. ACPS provides the basis for the Bank's operations in a country,and the Bank is helping both countries converge with the EUand better absorb EU funds. In Bulgaria, the CPS focuses onproductivity and employment, fiscal sustainability and absorp-tion of EU funds, and social inclusion. The Romania CPS isorganized around 3 central themes: accelerating structural andinstitutional reforms to support economic growth, addressingfiscal vulnerabilities and modernizing the public sector, andreducing poverty and promoting social inclusion. For moreinformation on the World Bank's work in these countries, visit:

http://www.worldbank.bghttp://www.worldbank.org.ro

Job Creation Forum Addresses LaborMarket Reform

A Forum on Job Creation in Eastern Europe and CentralAsia was held in Istanbul on June 12 — 13, hosted by the WorldBank's Europe and Central Asia Human DevelopmentDepartment and the Government of Turkey's State PlanningOrganization. The conference brought together experts fromacross the region to share information on recent country expe-riences with labor market reform; discuss the policy implica-tions of the latest World Bank and external research; attempt toarrive at a broad consensus on necessary reforms to increaseemployment and improve the quality of jobs in the region; anddiscuss how the Bank and other donors can operationally sup-port client countries in pursuing needed reforms. The confer-ence used a multi-sectoral approach to address the employmentagenda. To read the new Turkey Labor Market Study, go to: http://www.worldbank.org.tr/WBSITE/EXTERNAL/COUN-

TRIES/ECAEXT/TURKEYEXTN/0,,contentMDK:20873325~pagePK:141137~piPK:141127~theSitePK:361712,00.html

European Commissioner Pledges Supportfor Europe's Roma Community

The European Commission pledged to make EU financialresources available to fund Roma programs in Central andSoutheast Europe, including Structural Funds for the new EUmember states and Pre-Accession Funds for countries on the EUmembership track. Commissioner Vladimir Spidla made theseremarks at an international meeting in Brussels, which he co-hosted with Romanian Vice Prime Minister Marko Bela. TheJune 12 meeting brought together senior representatives of theeight countries that established the Decade of Roma Inclusion in2005. Roma leaders and representatives of international organi-zations, including the Open Society Institute and the WorldBank, participated. The Bulgarian Government will take over therotating chairmanship of the Decade's International SteeringCommittee from Romania on July 1. Its plans for the comingyear include improving cooperation between national govern-ments and the EU. Nikolaus Van Der Pas, the EU's DirectorGeneral of Employment, Social Affairs, and Equal Opportunity,concluded the meeting by emphasizing the importance of mak-ing the most of the potential of young Roma. Greater Roma par-ticipation in the labor market will bring substantial economicbenefits to a Europe facing a demographic crisis as its youthpopulation declines, he said. For more information, visit

http://www.worldbank.org/roma

Russia and World Bank Announce NewCooperation In Support Of Global Development

World Bank President Paul Wolfowitz and Russian FinanceMinister Alexei Kudrin agreed on June 9 to work together tohelp poor countries in the areas of debt relief, infectious diseases,and energy and development. Their announcement was made inthe context of a G8 finance ministers' meeting. Mr. Wolfowitzand Mr. Kudrin agreed to collaborate in developing a debt-for-development swap arrangement to channel US$250 million forpriority needs in Sub-Saharan Africa. Joint World Bank-Russiaefforts on infectious diseases will focus on Sub-Saharan Africaand Central Asia. The World Bank and Russia also agreed toscale up access to modern energy services in the least developedcountries, with a special emphasis on Africa. The World Bankwill provide technical assistance to the Russian authorities inestablishing a national system for official development assis-tance. In concluding, Mr. Wolfowitz and Mr. Kudrin agreed totake stock of implementation of their program of cooperationtwice a year at the time of the World Bank/IMF Spring andAnnual Meetings, to be held in Singapore September 19— 20.

More Countries in ECA Receive Funding toCombat Avian Flu

Armenia and Georgia joined several other countries in theECA Region as the Bank's Board of Directors approved fund-ing on June 1 to raise awareness of and halt the spread of avianflu. Although Armenia has not yet experienced an outbreak of

·26 Agenda


avian flu, the virus's spread to neighboring countries, such asGeorgia, prompted an early response. Both projects addressthree components: animal health, human health, and a publicawareness campaign. While the first two components willstrengthen government offices and the health sector to ensurethorough preparation and an effective response in case of out-breaks, the public awareness portion plans to increase knowl-edge among civil society and the general population about therisks and potential impact of avian flu. For more informationabout the Bank's work in Armenia and Georgia, visit:

http://www.worldbank.org.am,http://www.worldbank.org/ge

Regional AIDS Fund Announces First RoundGrants to Fight HIV/AIDS in Central Asia

At the end of May, the Regional AIDS Fund announced thelaunch of a grant program for countries benefiting from theCentral Asia AIDS Project, co-financed by the World Bank andthe UK's Fund for International Development. The countriescovered by the project include Kazakhstan, Kyrgyzstan,Tajikistan, and Uzbekistan. Grants will be awarded to nation-al and regional initiatives (sub-projects) of NGOs, and govern-mental, public, and private sector entities on a competitivebasis. Application criteria are detailed on the regional projectwebsite: http://www.caap.info/. The Fund is particularly keento fund work in such areas as: HIV/AIDS prevention; scaling-up voluntary testing for HIV/AIDS antibodies and counseling;improving access to treatment, care and support for people liv-ing with HIV/AIDS; conducting sentinel epidemiological sur-veillance; promoting tolerance towards people living withHIV/AIDS, fighting stigma and discrimination; strengtheningthe capacity of organizations of people living with HIV/AIDS,and prevention of drug use, treatment, and rehabilitation ofdrug dependency. The deadline for submission of sub-projectproposals is August 9, 2006.Full information is available inRussian language at: http://aids.uz.

Eastern European and Central AsianCountries Share Global Best Practice onHIV/AIDS

A three-day conference called "Facing the Challenge,"organized by the Russian Government with the support ofUNAIDS, the World Bank, and other international partners,opened on May 15. Its goal was to strengthen the collectivecapacity of Eastern European and Central Asian governments,civil society groups, experts, people living with AIDS, anddonors to respond to the epidemic, nearly 25 years afterHIV/AIDS was first identified. The event gave the countries inEastern Europe and Central Asia an unprecedented opportuni-ty to learn from the experience of the rest of the world in fight-ing HIV/AIDS. The World Bank organized satellite sessionsfocusing on strengthening health systems and on implementinga successful regional strategy in Central Asia. The World Bankalso supported the participation of high-level delegations fromseveral countries where it is funding ongoing AIDS projects.The director of the World Bank's Global HIV/AIDS program,Debrework Zewdie, headed the World Bank's delegation.

New EU8 Quarterly Economic ReportGenerally Optimistic

The latest edition of the EU8 Quarterly Economic Report,launched in Warsaw and Bratislava on May 30, finds that eco-nomic growth in the EU8 countries in 2005 proved to be robustand resistant to domestic political uncertainty and difficult exter-nal conditions. Despite recent signs of weakening emerging mar-ket sentiment, short-term economic prospects remain favorable.The analysis of the links between public finances and growth inthe region shows that progress has been made on making publicfinances more growth oriented, but much more could be done.The report also looks at the economic impact of avian influenza,the planning of EU structural funds for the budgetary period2007-2013, progress in meeting Lisbon Agenda targets, and therole of incentives in attracting foreign direct investment. Thereport is available at http://www.worldbank.org/eu8-report.

World Bank President Delivers Lecture onTurkey

World Bank President Paul Wolfowitz delivered a speechtitled ''Turkey: Embracing East and West'' at the SecondAnnual Sakip Sabanci Conference held by Sabanci Universityand the Brookings Institution in Washington D.C on May 23.Mr. Wolfowitz touched on Turkey’s economic and socialimprovements and stressed that they are important both for itsneighbors and the rest of the world. However, he indicated thatdespite Turkey's significant economic reforms, unemploymentis still too high. Wolfowitz indicated that Turkey’s EU accessionwould bring several benefits to the EU. He added that Turkeyshould focus on its education system and employment. Mr.Wolfowitz also emphasized Turkey's secularism and its respectfor religion. To read the speech, go to http://www.world-bank.org.tr/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/TURKEYEXTN/0,,contentMDK:20933010~menuPK:361718~pagePK:141137~piPK:141127~theSitePK:361712,00.html

2006 Western Balkans DevelopmentMarketplace Rewards Innovation

The first ever West Balkans Development Marketplace tookplace in Belgrade on May 17 — 18. A total of 55 finalists fromAlbania, Bosnia and Herzegovina, Macedonia, Serbia andMontenegro, and Kosovo-selected in a competitive process atthe national level-presented their innovative ideas for job cre-ation in the formal sector and competed for grants of aroundUS$35,000 per project. An international jury chaired byCountry Director Orsalia Kalantzopoulos selected 21 projectsfrom the region, winning a total of US$712,000 raised fromdonors. As a complementary activity, a Knowledge Forum focus-ing on youth employment was held on May 17, organized inpartnership with the prominent local NGO Civic Initiatives. Theevent was an opportunity to exchange experience with a focuson models of youth empowerment and youth inclusion in thelabor market.

This section has been provided courtesy of Merrell Tuck andChristina Lakatos, Europe and Central Asia External Affairs BT

· 27New Books and Working Papers


World Bank Working Papershttp://econ.worldbank.org

Neil Parison, Yelena Dobrolyubova, Gord Evans, NickManning, and Yulia Shirokova

Increasing Government Effectiveness: Approaches toAdministrative Reform in the Russian Federation

Report 36142, May 2006

In the Russian context, administrative reform denotesreforms connected to the structure and functions of govern-ment; approaches to managing government performance(strategic planning, performance management, internalaccountability); and approaches to improving service deliveryand responsiveness (transparency, service quality programsand external accountability). This paper attempts to raiseissues and explore options relevant to the next generation ofRussian administrative reforms by: a) summarizing adminis-trative reform approaches and methodologies from othercountries appropriate to the context and specific reform agen-da in Russia, including brief case studies and lessons learned;b) providing an index of websites with links both to the actu-al tools used by officials and practitioners from the selectedcountries, as well as to the resulting products (the index isincluded in the References section at the front of this paper);and c) assessing the implications of international experiencefor the further development and implementation of adminis-trative reform in the Russian Federation.

Roberta Gatti and Inessa Love Does Access to Credit Improve Productivity? Evidence from

Bulgarian FirmsWPS3921, May 2006

Although it is widely accepted that financial development isassociated with higher growth, the evidence on the channelsthrough which credit affects growth on the micro-level is scant.Using data from a cross section of Bulgarian firms, the authorsestimate the impact of access to credit (measured by whetherfirms have access to a credit or overdraft facility) on produc-tivity. The authors use information on firms' past growth toinstrument for access to credit and find credit to be positivelyand strongly associated with total factor productivity.

Anqing ShiMigration in Towns in China, a Tale of Three Provinces:

Evidence from the 2000 Census Preliminary Tabulations WPS3890, April 2006

There is a concern that the growth of towns in China hasbeen stalled recently and with it, the creation of nonfarm jobsin rural industries. The author uses the 2000 census tabulationsto look at this issue by examining the educational attainment,original place, and occupational composition of immigrants intowns in three provinces in China-Zhejiang, Henan, andSichuan. In addition to the diversified patterns of town immi-grants revealed in the three provinces, the author finds thattown immigrants generally possess a higher level of education-al attainment than the local population in the towns, especiallyin the less developed western and central regions. This inflow of

human capital could foster development in towns. There is alsoevidence that as economic opportunity increases in towns, suchas in the richer coastal province of Zhejiang, better educatedpeople in rural areas are likely to shift their jobs from the farmto the nonfarm sector in towns nearby, instead of leaving thecountryside to migrate to other provinces. This could reducemigration pressure on big cities. Finally, the labor market intowns in the less developed west and central regions is moreflexible in accommodating immigrants, whereas in the devel-oped province of Zhejiang the labor market is segregatedbetween immigrants and the local population.

Paloma Lopez-GarciaBusiness Environment and Labor Market Outcomes in

Europe and Central Asia CountriesWPS3885, April 2006

New firm entry has been fundamental for job creation in thetransition economies. Hence the urge to reform the frameworkin which firms operate. This paper aims to improve our under-standing of the business environment of the Europe and CentralAsia (ECA) countries, as well as to assess which of the institu-tions that shape it are most important for labor market per-formance. To achieve that aim, the author groups the institu-tions into those affecting firm entry and those affecting businesssurvival and growth, and proceeds to construct indicators tosummarize them. Next, she analyzes the impact of the businessenvironment institutions on the employment generated by theprivate sector of the countries, measured by the service employ-ment rate. The author finds that access to finance is the mostimportant institution across all ECA countries. On the otherhand, the poor access to finance in Bulgaria, Croatia, and aboveall, Romania, is the main factor behind their poor developmentof the private sector. Market regulation, start-up costs, and thetax burden are also found to significantly affect employment.

Paolo VermeConstraints to Growth and Job Creation in Low-Income

CIS CountriesWPS3893, April 2006

Despite sustained output growth since 1997, low-incomeCommonwealth of Independent States countries (CIS-7) havenot experienced growth in employment, a phenomenonobserved elsewhere in transitional economies and labeled as"jobless growth." The author addresses the causes of this phe-nomenon in the CIS-7. He argues that the lack of job creationis explained by a combination of structural factors, includingcapital-intensive growth, large potential for productivity gainsamong existing workers, and compartmentalized economiesbest depicted by a dual labor market framework. With govern-ments and the international community currently refrainingfrom investing in agricultural and industrial policies focusedon reviving manufacturing, jobless growth is likely to persist.

Jan RutkowskiLabor Market Developments during Economic TransitionWPS3894, April 2006

The paper reviews labor market developments in the tran-sition economies of Europe and Central Asia. It argues that the

·28 New Books and Working Papers


scarcity of productive job opportunities and the growing labormarket segmentation are the two main labor market problemsfacing the transition economies. In the European transitioneconomies, the lack of jobs has led to persistent and openunemployment. In the CIS it has led to hidden unemployment.Unemployment in the European transition economies is sup-ported by a developed social safety net. In the CIS most work-ers either stick to their old, unproductive jobs in unrestructuredenterprises, or work in the informal sector, or resort to subsis-tence agriculture. The high employment-to-population ratios inmany CIS countries often indicate delayed enterprise restruc-turing, the maintenance of unsustainable jobs in uncompetitivefirms, and the existence of a large informal sector as anemployer of last resort. Labor market segmentation, which ismore pronounced in the CIS, has been caused by a sharpincrease in earnings differentials and the attendant increase inthe incidence of low-paid jobs, by the polarization of regionallabor market conditions, and finally by the growth of the infor-mal sector offering casual, low-productivity jobs.

Peter HuberRegional Labor Market Developments in TransitionWPS3896, April 2006

The author finds that large and persistent regional labormarket disparities developed in virtually all transition countriesand that there is some evidence of polarization. Differences instarting conditions and market access seem to be the major rea-sons for regional divergence in transition. Regional wages areonly slightly more flexible than in many European Union labormarkets, interregional migration is low, and capital seems tomove toward high wage and low unemployment urban centersrather than to the most backward regions. Policy should thustake a long-term perspective on the existing regional disparities,focus on removing barriers to mobility, review existing institu-tions for implementing regional policy, and aim at the closecoordination of regional and labor market policy instruments.

John S. Earle and David J. BrownThe Microeconomics of Creating Productive Jobs: A

Synthesis of Firm-Level Studies in Transition EconomiesWPS3886, April 2006

The challenge for labor market policy in transitioneconomies has been to redress the sharp drops in employmentin a way that fosters the creation of productive jobs. Theauthors first document the magnitude and productivity of joband worker reallocation. They then investigate the effects ofprivatization, product and labor market liberalization, andobstacles to growth in the new private sector and its produc-tivity in Hungary, Romania, Russia, and Ukraine. The authorsfind that market reform has resulted in a large increase in thepace of job reallocation, particularly that occurring betweensectors and through firm turnover. Unlike under central plan-ning, the job reallocation during the transition has contributedsignificantly to aggregate productivity growth. Privatizationhas not only stimulated intrasectoral job reallocation, but thereallocation is more productive than that among remainingstate firms. The effect of privatization on firm productivityvaries considerably across countries and is not always positive.The productivity gains from privatization have generally not

come at the expense of workers but are rather associated withincreased wages and employment.

Felix Eschenbach and Bernard HoekmanServices Policies in Transition Economies: on the European

Union and the World Trade Organization as CommitmentMechanisms

WPS3951, June 2006

The authors analyze the extent to which the EU-15 and 16transition economies used the WTO General Agreement onTrade in Services (GATS) to commit to service sector policyreforms. They compare GATS commitments with the evolutionof actual policy stances over time. While there is substantialvariance across transition economies on both actual policies andGATS commitments, the authors find an inverse relationshipbetween the depth of GATS commitments and the "quality" ofactual services policies as assessed by the private sector. In partthis can be explained by the fact that the prospect of EU acces-sion makes GATS less relevant as a commitment device for asubset of transition economies. But for many of the non-EUaccession candidates, the WTO seems to be a weak commitmentdevice. One explanation is that the small size of the marketsconcerned generates weak external enforcement incentives. Theauthors' findings suggest greater collective investment by WTOmembers in monitoring and the need for transparency toincrease the benefits of WTO membership to small countries.

BOFIThttp://www.bof.fi/bofit/fin/6dp/index.stm

Olena Havrylchyk and Emilia JurzykProfitability of Foreign Banks in Central and Eastern

Europe: Does the Entry Mode Matter?BOFIT Discussion Papers No 5 / 2006

Using data for 265 banks in Central and Eastern Europeancountries (CEECs) for the period 1995-2003, this paper ana-lyzes the differences in profitability between domestic and for-eign banks. The authors show that foreign banks, especiallygreenfield institutions, earn higher profits than domestic banks.However, this effect is acquired rather than inherited, sincethere is evidence that foreign banks tend to take over less prof-itable institutions. Profits of foreign banks in CEECs alsoexceed the profits of their parent banks, explaining the reasonsfor their entry. Further, the authors study the costs and benefitsof foreign ownership by analyzing determinants of profitabili-ty for domestic, takeover, and greenfield banks. The profits offoreign banks are less affected by macroeconomic conditions intheir host countries. However, greenfield banks are sensitive tothe prevailing situation of their parent banks. Only domesticbanks enjoy higher profits in more concentrated banking mar-kets, whereas takeover banks suffer from diseconomies of scaledue to the fact that they acquire large institutions.

Laura SolankoCoping with Missing Public Infrastructure: An Analysis of

Russian Industrial EnterprisesBOFIT Discussion Papers No 2 / 2006

· 29


During the Soviet period industrial firms not only formedthe backbone of the economy but also directly provided a widerange of benefits to their municipalities. Firms were in chargeof supplying a great variety of social services, such as housing,medical care and day care. The need to divest at least some ofthese functions was generally accepted in the early 1990s.Industrial firms' engagement in the provision of infrastructureservices, such as heating, electricity and road upkeep has todate received much less attention. Using a dataset of 404 largeand medium-sized industrial enterprises in 40 regions ofRussia, this paper examines public infrastructure provision byRussian industrial enterprises. The authors find that, first, to alarge degree engagement in infrastructure provision — asmeasured by district heating production — is a Soviet legacy.Second, firms providing district heating to users outside theirplant area are more likely to have close relations with the localpublic sector along many other dimensions.

CEFIRhttp://www.cefir.org

Tuuli Juurikkala and Olga LazarevaLobbying at the Local Level: Social Assets in Russian FirmsWP 61, January 2006

In the planned economy firms were made responsible forproviding their workers with social services, such as housing,day care and medical care. In Russia during the transition ofthe 1990s, social assets were to be transferred from industrialenterprises to the public sector. The law on divestment provid-ed little more than general principles. Thus, for a period of sev-eral years, property rights concerning a major part of socialassets, most notably housing, were not properly defined, astransfer decisions were largely left to the local level players.Strikingly, the time when assets were divested varied consider-ably across firms. The authors utilize recent survey data from404 medium and large industrial enterprises in 40 Russianregions and apply survival data analysis to explore the deter-minants of divestiture timing. The results show that in munic-ipalities with higher shares of their own revenues in the localbudget and thus weaker fiscal incentives, firms used their socialassets as leverage to extract budget assistance and other formsof preferential treatment from local authorities. The authorsalso find evidence that less competitive firms were using thesesocial assets to cushion themselves from product market com-petition.

CASEwww.case.com.pl

Alexey Kisenkov, Piotr Kozarzewski, Irina Lukashova,Maria Lukashova, and Julia Mironova

The System of Corporate Governance in KyrgyzstanStudies and Analysis # 326, June 2006

The paper looks at the formation of the modern corporategovernance system in the Kyrgyz Republic. The main factorsthat influence this process have been studied, e.g., legal back-

ground and the practice of privatization; corporate and anti-monopoly law; financial markets; stakeholders' activities, etc.The authors conclude that there were significant positivechanges in the sphere of corporate governance in the KyrgyzRepublic. In a country without previous experience of privateproperty and the market, institutions of corporate governancehave been formed, and a learning process by both owners andmanagers about how to govern a company using the given setof laws and regulations has been going on. This process is farfrom complete, since existing corporate relations are still verydysfunctional. Further improvements require the upgrading oflegislation accompanied by active measures aimed at improv-ing the situation in all spheres that influence the quality of cor-porate governance. The main task is the creation of a favorablelegal and institutional climate which would lead to improve-ments in common norms of corporate governance and theattraction of external investments.

Jens Holscher, Mariusz Jarmuzek, Roman Matousek, andEva Katalin Polgar

Fiscal Transparency in Transition EconomiesStudies and Analysis # 328, June 2006

Fiscal transparency became a topic of public and academicdebate in the aftermath of the Mexican and Asian financialcrises. The concept of fiscal transparency is, however, largely ofa qualitative nature and is therefore something of a challengeto measure. This paper proposes an index of fiscal transparen-cy that comprises various aspects of fiscal policy formulation.The index is compiled for twenty seven transition economiesand is based on a detailed analysis of the actual informationdisclosed. Analysis of the fiscal transparency index shows aclear pattern indicating that the group of Central and EasternEurope (CEE) countries stands out across all categories fromthe other two groups of countries in the analysis, South EasternEurope (SEE) and the CIS. This seems to be the result of theanchoring of the New Member States in the EU's structuresand procedures. SEE countries come behind this first group,experiencing serious difficulties in budgetary process andreporting standards. The CIS countries still have a long way togo to meet international standards. They must enhance budg-etary practices and accounting procedures, as they lag behindthe above groups most clearly in this regard.

Call for Papershttp://www.sant.ox.ac.uk/jcr/STAIR

St Antony's International Review is soliciting book reviewsfor its next issue on democratization. Practitioners, academicsand graduate students are invited to suggest relevant booksthey wish to review by e-mailing Kalin Ivanov, Book ReviewsEditor at [email protected]. Final submissionsare due on 1 September 2006. Please consult the guidelines at:www.sant.ox.ac.uk/jcr/STAIR/files/ReviewerGuidelines.pdf

St Antony's International Review is a peer-reviewed aca-demic journal established by graduate members of St Antony'sCollege at the University of Oxford. Published twice a year, itfosters cross-disciplinary dialogue on global issues of contem-porary relevance. BT

·30 Conference Diary


21st Annual Congress of the European EconomicAssociation and the Econometric Society EuropeanMeetings

August 24 — 28, 2006, Vienna, Austria

The European Economic Association (EEA) and theEconometric Society (ES) are international scientific organiza-tions that are dedicated to the promotion and dissemination ofcontemporary economic research, including theoretical, empiri-cal, and policy-relevant contributions. The local organization2006 EEA-ESEM meetings will be jointly conducted by theInstitute for Advanced Studies, Vienna (IHS) and the Universityof Vienna.

More information: http://www.eea-esem2006.org/

European Summer Symposium in Labor Economics2006 (ESSLE)

September 14, 2006, Ammersee, Germany

ESSLE is designed to bring together labor economists fromacross Europe and researchers from outside the region. Thesymposium provides an opportunity for researchers from dif-ferent universities and countries to discuss their work in arelaxed atmosphere and to develop long-term collaborativerelationships. Another important aim of ESSLE is to provideyoung researchers with the opportunity to meet and discusstheir work with senior economists.

http://www.iza.org/conference_files/essle2006/call_for_papers

2006 Annual Meetings of the InternationalMonetary Fund and the World Bank Group

September 16 — 18, 2006, Singapore

Centered on the theme "Asia in the World, the World inAsia", the 2006 Program of seminars will feature over 30 ses-sions on international finance and development issues affectingthe lives of people and businesses regionally and globally:

• Capital Markets and the Financial Sector in theEmerging Markets

• Corruption, Governance and Growth • Infrastructure for the 21st Century • Investment Climate; Trade and Investment • Energy and Security • Growth and Equity • Innovation and Technology.http://www.imf.org/external/am/2006/schedule.htm

Global Financial and Monetary Governance, the EU,and Emerging Market Economies

September 27 — 29, 2006, Amsterdam, the Netherlands

The financial crises in the last decade have generated a con-sensus that there is room for improvement in the global finan-cial architecture. This conference wants to help broaden itsscope, in particular in relation to poverty reduction, develop-ment goals and financial stability issues in a range of countriesaround the world. The following issues will be considered:

• Monetary politics, financial regulation and "econom-ic development". Expertise focusing on the national, theregional (European and other) and the global level.

• Issues confronting highly industrialized countries,emerging market economies, developing countries and coun-tries in transition.

• Normative and empirical questions.http://wi-garnet.uni-muenster.de/index.php?id=196

Advancing Health EquitySeptember 29 — 30, 2006, Helsinki, Finland

The conference will bring together researchers and practi-tioners, from both developed and developing countries, to ana-lyze the causes and consequences of health deprivation andinequality, to examine patterns and trends in these outcomes,to evaluate alternative policy options, and to identify futureresearch directions.

http://www.wider.unu.edu/conference/conferences.htm

The Role of the State in the Economy in the 21stCentury

October 13 — 14, 2006, Moscow, Russia

Organizers: the Global Institute, BP, CEFIR at NES(Russia), CSR (Russia), CCWE (China), and CCER (China).The experience of Russia, China and India will be comparedand shared in the following panels:

• The Development Strategies of the XXI Century:Striking the Balance between the State and the Market

• Incentives within Government Bureaucracy • The Macroeconomic Role of the State: Targeting Real

Exchange Rate or Inflation? • The Nation State in the Global Economy • The State and the Knowledge Economy • The Energy Challenge • Inequality and Social Stability.More information: www.cefir.ru

Marie Curie Training Course on Cooperatives inTransition Countries

October 9 — 13, 2006, Sofia, Bulgaria

The course will be organised by the Institute for CooperativeStudies, Humboldt University Berlin, Germany, and the Instituteof Agricultural Economics, Sofia, Bulgaria. It is the first trainingcourse in the series of events offered by the Marie Curie Projecton "Modern Agriculture in Central and Eastern Europe: Toolsfor the Analysis and Management of Rural Change". It willintroduce the participants to the present state of research andwill deal with empirical methodologies for analysing co-opera-tives, their institutional design, institutional performance andinstitutional change. Deadline for the application and theabstract: August 31, 2006.

Information: www.mace-events.org. Contact: MarlisWerner, Institute for Cooperative Studies, Humboldt UniversityBerlin, phone +49 30 2093 6500, fax +49 30 2093 6501, email:[email protected] BT

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"Energy poverty in Macedonia and the Czech Republic" by StefanBuzar

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·32

Beyond TransitionManaging Editor: Ksenia Yudaeva(Center of Strategic Research, Moscow)

Editorial Board:Alan Gelb, Director, Development Policy(The World Bank, Washington, DC)

Pradeep Mitra, Chief Economist Europe & Central Asia Region (The WorldBank, Washington, DC)

Boris Pleskovic, Research Manager,Development Economics (The WorldBank, Washington, DC)

Erik Berglof (EBRD, London)

Editor in Chief: Olga Mosina (CEFIR atNES, Moscow)E-mail: [email protected]

Co-ordinating Editor: Andrew Austin(CERGE-EI, Prague)Production Manager: Julia Babich(CEFIR at NES, Moscow)Cartoons: Ekaterina Yakovleva

The World Bank 1818 H Street, N. W.Mail Stop: MC3-302Washington D.C. 20433, USAhttp://www.worldbank.org

CEFIR at NESCentre for Economic and FinancialResearch at New Economic SchoolNakhimovsky prospekt, 47, office 720117418 Moscow, RussiaTel. +7 495-105 5002http://www.cefir.ru

CERGE-EIP.O. Box 882, Politickych veznu 7111 21 Praha 1, Czech Republichttp://www.cerge-ei.cz

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