International Experience of Economic Reforms ARGENTINA

Privatisation of key companies was carried out in Argentina . Selected micro-economic indicators taken for the period between 1982-92 show that the average growth in per capita of GDP as a percentage of constant prices between 1982-86 was 0.9 but it improved to 7.6 in 1991 and 7.5 in 1992. In the area of inflation, the position was very bad in 1982- 86 with its percentage rising to 316.5 but gradually the reforms came to the rescue and brought it down to 24.9 percent.

BRAZIL
This Latin American country also encouraged large foreign investment and large development projects. U.S.A., Europe and Japan poured loans into Brazil (cheap imported oiled and easy foreign capitals).Import substitution industrialisation reigned supreme from 1950 to 1962 and 1968 to 1981.But frequent state intervention was alleged as the cause of deterring investment and technology. Strong state sector dominated but flawed, for indiscipline, due to independent power of borrowings and rampant mismanagement. Country suffered from high foreign debts and flight of capital. Its privatization efforts are aimed at reducing the public sector deficits. So it reached in1987 an agreement with creditor governments on rescheduling $ 4 billion of debt without a parallel agreement with IMF.government allowed certain industries to have free adjustment of price. Foreign debt servicing is the main problem. It has relied on government to government transaction. Privatisation was judicially inducted to improve efficiency of the public sector.

INDONESIA
The country suffered from world recession and falling foreign exchange revenues resulting in rescheduling of projects. Inefficient monopoly, high transport and energy cost make industry non-competitive, small size of market high labour cost, corruption, red tape and lack of infrastructure repel investors. Infrastructure building is not open to the private sector. Indonesia has 215 state industries and now started privatization. Foreigners equity can be up to 80 percent in export sector firms. It deregulated protected sector, relaxed capacity ceiling which can be succeeded by 30 percent without permission

NIGERIA
The oil revenue of Nigeria has been invested number of times in public sector projects. The spending from high foreign exchange reserves resulted in high rates of inflation. Expenditure on infrastructure went to construction and services and neglected manufacturing. The result was narrow urban based production structure. The 1980s oil glut and losses were encountered with austerity measures. It failed to correct foreign payment crisis. Consumer imports, prestigious and wasteful projects, political patronage and personal enrichment were the causes of ill. The government adopted measures of devaluation, package of fiscal measures like abolition of import licences, price control and subsidies. The restructuring of economy was attempted via (I ) diversification and reduction of dependence on oil, (ii) fiscal balance, (iii) platform of sustainable non-oil noninflationary growth and (iv) reduced investment on and improved efficiency of the public sector.

THAILAN D
Industry comprises 20 percent of Thai GDP and 7 percent workforce (textile, sugar, cement, and petroleum). Favourable economic factors were lower interest and electricity rates and lower domestic oil prices. Constraints are slow project approval procedure, underdeveloped transport, communication and ports. Its main priorities are small and rural engineering and agro- industries. But protectionism adopted against it by industrially advanced countries impede growth of its export-oriented industries. The government has tried to attract high tech as well as heavy industries. Following the spate of privatization, a number of American subsidiaries have come.

KOREA
The Seoul government has made enormous progress in restructuring. Asia's third largest economy. He says the impact of instituting reforms and maintaining a tight monetary policy has been most noticeable in the substantial rise in South Korea's foreign reserves. They rose from nearly $9-billion at the end of 1997 to $45-billion last month. The country has also recorded a current account surplus of $31-billion for the first time in nine months. The country's short-term debt fell from 44% to 25% of total debt over the last 10 months in 1997. He says while economic reform has been painful for South Koreans, the recovery plan is on schedule and signals a brighter future for business investment in South Korea. Other factors in South Korea's economic recovery are a stabilization in the country's currency -- the won -and government efforts to restructure the banking and corporate sectors. But he adds despite the large-scale reforms, South Korea's economic recovery will take longer if a turn around in the global economic environment does not occur in the next year.

CHINA
China's transition from a planned economy to a market economy began at the end of 1978. When China started the process, the government did not have a well-designed blueprint. The approach to reform can be characterized as piecemeal, partial, incremental, and often experimental. Some economists regard this approach as self-defeating (Murphy, Schleifer, and Vishny 1992). China's average annual rate of GDP growth has been miraculous since the beginning of the transition (Lin et al. 1996) and is the most successful of the transition economies. Nevertheless, the Chinese economy has been troubled by an increasingly serious "boom and bust" cycle (see Figure 1). Changes in the macropolicy environment started in the commodity price system. After the introduction of profit retention, the enterprises were allowed to produce outside the mandatory plan. The enterprises first used an informal barter system to obtain the outside-plan inputs and to sell the outside-plan products at premium prices. In 1984, the government introduced the dual-track price system, which allowed the state enterprises to sell their output in excess of quotas at market prices and to plan their output accordingly. The aim of the dual-track price system was to reduce the marginal price distortion in the state enterprises' production decisions while leaving the state a measure of control over material allocation. By 1988 only 30 percent of retail sales were made at plan prices, and the state enterprises obtained 60 percent of their inputs and sold 60 percent of their outputs at market prices (Zou 1992). The second major change in the macro environment occurred in the foreign exchange rate policy. In the years 1979-80, the official exchange rate was roughly 1.5 yuan per U.S. dollar. The rate could not cover the costs of exports, as the average cost of earning one U.S. dollar was around 2.5 yuan. A dual rate system was adopted at the beginning of 1981. Commodity trade was settled at the internal rate of 2.8 yuan per dollar; the official rate of 1.53 yuan per dollar continued to apply to non- commodity transactions. After 1985, the yuan was gradually devalued. Moreover, the proportion of retained foreign exchange, which was introduced in 1979, was gradually raised, and enterprises were allowed to swap their foreign exchange entitlement with other enterprises through the Bank of China at rates higher than the official exchange rate. Restrictions on trading foreign exchanges were further relaxed with the establishment of a "foreign exchange adjustment center" in Shenzhen in 1985, in which enterprises could trade foreign exchanges at negotiated rates. By the late 1980s, such centers were established in most provinces in China and more than 80 percent of the foreign exchange earnings was swapped in such centers (Sung 1994). The climax of foreign exchange-rate policy reform was the establishment of a managed floating system and unification of the dual rate system on January 1, 1994. Interest-rate policy is the least affected area of the traditional macropolicy environment. Under the HIODS, the interest rate was kept artificially low to facilitate the expansion of capital-intensive industries. After the reforms began in 1979, the government was forced to raise both the loan rates and the savings rates several times. However, the rates were maintained at levels far below the market-clearing rates throughout the reform process. In late 1993, the government announced a plan to establish three development banks with the function of financing long- term projects, import/export, and agricultural infrastructure at

subsidized rates and to turn the existing banks into commercial banks. The three development banks were established in 1994. The commercialization of the existing banks is expected to take at least another three to five years. Moreover, it is unclear whether after the reform the interest rate will be regulated or will be determined by markets. The mentality of the HIODS is deeply rooted in the mind of China's political leaders. To accelerate the development of capital-intensive industry in a capital-scarce economy, a distorted macropolicy environment--in the form of a low interest-rate policy--is essential. It is likely that administrative interventions in the financial market will linger for an extended period. Because reforms in macro-policies, especially those regarding the interest rate, lagged behind the reforms in the allocation system and micro- management institutions, there were several economic consequences. The first one was the recurrence of a growth cycle. Maintaining the interest rate at an artificially low level gave enterprises an incentive to obtain more credits than the supply permitted. Before the reforms, the excess demands for credit were suppressed by restrictive central rationing. The delegation of credit approval authority to local banks in the autumn of 1984 resulted in a rapid expansion of credits and an investment thrust. As a result, the money supply increased 49.7 percent in 1984 compared with its level in 1983. The inflation rate jumped from less than 3 percent in the previous years to 8.8 percent in 1985 (see Figure 1). In 1988 the government's attempt to liberalize price controls caused a high inflation expectation. The interest rate for savings was not adjusted. Therefore, panic buying and a mini-bank run occurred. Loans, however, were maintained at the previously set level. As a consequence, the money supply increased by 47 percent in 1988. The inflation rate in 1988 reached 18 percent. During the periods of high inflation, the economy overheated. A bottleneck in transportation, energy, and the supply of construction materials appeared. Because the government was reluctant to increase the interest rate as a way of checking the investment thrust, it had to resort to centralized rationing of credits and direct control of investment projects--a return to the planned system. The rationing and controls gave the state sectors a priority position. The pressure of inflation was reduced, but slower growth followed. As mentioned earlier, although the reforms in the micro- management institution improved the productivity of the state sector, deficits increased due to a faster increase of wages and welfare as a result of the discretionary behavior of the managers and workers in the state enterprises. Therefore, fiscal income increasingly depended on the non- state sectors. During the period of tightening state control, the growth rates of the non-state sectors declined because access to credits and raw materials were restricted. Such a slowdown in the growth rate became fiscally unbearable. Therefore, the state was forced to liberalize the administrative controls to make room for the growth of the non-state sectors. A period of faster growth followed. Nevertheless, conflicts arose again between the distorted macro-policy environment and the liberalized allocation mechanism and micromanagement institution. There has been much discussion as to why China's reforms have been more successful than the reforms in Eastern Europe and the former Soviet Union (Chen et al. 1992; Qian and Xu 1993; Harrold 1992; McMillan and Naughton 1992; Gelb et al. 1993; McKinnon 1994).

Except for the desirability of gradualism, the studies emphasized China's initial industrial structure (China has a large agricultural sector) or China's decentralized regional economic structure. If China's success was mainly the result of her unique initial conditions, then that success does not have any implications for other economies, where the initial conditions may be different. Nevertheless, the economic problems in pre-reform China-namely, the structural imbalance and the low incentives--are common to all socialist economies because they all adopted a similar economic development strategy and because they all have a similar macropolicy environment, planned allocation mechanism, and puppet-like state enterprises. Empirical evidence shows that, as in prereform China, Eastern European and Soviet economies were all overindustrialized with oversized state enterprises; thei service sectors and light industries were underdeveloped; and employees' incentives were low (Newbery 1993; Brada and King 1991; Sachs and Woo 1993). The "big bang" approach in Eastern Europe and the former Soviet Union also attempts to replace an inefficient economic system with a more efficient market system. The privately owned small firms emerged immediately after the lifting of the ban on private enterprises. However, the privatization of medium- and large-scale state enterprises was prolonged and proceeded slowly (Murrel and Wang 1993, Wang 1992). This resulting enterprise mix is in fact similar to what emerged in China. However, China's approach did not disrupt production in the state sectors. Therefore, China's gradual approach to reform achieved the same positive effects of the "big bang" approach but avoided its costs. If transitional costs and the path-dependence of institutional changes are taken into account, China's gradual approach may be both theoretically and empirically preferable to the "big bang" approach (Wei 1993). The overall performance of China's gradual approach to transition is remarkable, but China has paid a price. Because the reform of the macro-policy environment, especially interestrate policy, has lagged behind reforms of the micro-management institution and resource allocation mechanism, institutional arrangements in the economic system have become internally inconsistent. As a result of the institutional incompatibility, rentseeking, investment rush, and inflation have become internalized in the transition process. To mitigate those problems, the government often resorts to traditional administrative measures that cause the economy's dynamic growth to come to a halt and retard institutional development. From the preceding analysis we find that it is imperative for China to complete the reform of the macro-policy environment so as to remove the institutional incompatibility and ensure a sustained, smooth growth path. Since the macro-policy environment is endogenous to the state's development strategy, the government must give up the anti-comparative advantage HIODS--or, in a modern version, the capital-intensive high-tech industry-oriented development strategy--and shift to a strategy based on China's comparative advantages. In addition, as the Chinese economy becomes a more mature market economy and is more integrated with the world economy, it is essential for the continuous growth of the Chinese economy to establish a transparent legal system that protects property rights so as to encourage innovations, technological progress, and domestic as well as foreign investments in China.

Thus far, most elements in China's reforms were induced rather than designed. However, the experience of China's transition may provide a useful lesson for designing reform policies in other economies where the heavy-industry-oriented strategy or other similar development strategies have been adopted under capital-scarce conditions. Certainly, stages of development, endowment structures, political systems, and cultural heritage differ from one economy to another. To be effective, actual reform measures should take the economy's initial conditions into consideration and exploit all favorable internal and external factors. Therefore, the specific design and sequence of reforms in an economy should be "induced" rather than "imposed." However, in addition to the general advice of maintaining economic and political stability and moving the reforms in a path-dependent manner, the following lessons may be useful for a government attempting reforms in an economic system similar to that of pre-reform China:

UNITEDKINGDOM
The U.K. set off the most aggressive and well known privatization programme. The British Government initially realized regularly 7 billion pound sterling from the sale of nationalize industries primarily by stock floatation, the most notable example being the sale of British Telecom and British Gas. The creation of a new regulatory authority for the telecommunication industry (OPTEL) was the British Government response to this challenge. The privatization of state owned British Airways followed by the privatization of BAA (British Airport Authority) is the most significant event in the aviation history of United Kingdom. Already seven airports involved- Heathrow, Gatwick, Stansted, Glasgow, Edinburg, Prestwick and Aberden have been converted into companies and are operating in their own right. Among other public enterprises which the British Government has privatized are the British Aerospace including defence equipment, British Leyland, Cable Wireless, British Wireless, British Oil, the hotel chain of British Railways, the Sea ports ran by Associated British parts, the National Freight Company which ran a large road haulage business and the Jaguar Car Company. The United Kingdom (UK) has a free market economy and a liberal financial services environment. In May, 1997, the Labour Party won an overwhelming Parliamentary majority, ending 17 years of Conservative government. The new Prime Minister, Tony Blair, inherited a strong economy, with the recovery from the 1990-92 recession in its fifth year. Gross Domestic Product (GDP) expanded 2.3% in 1996 and at a 3.0 percent annual rate during the first half of 1997. Most analysts expect growth to slow in the second half of 1997 and in 1998 as tighter monetary and fiscal policy combine with a stronger sterling to put a brake on the economy. Underlying inflation averaged 3.0 percent in 1996, and is now slightly above the 2.5% target range. Unemployment has fallen significantly, reaching 7.1% in summer 1997, well below that of many continental European nations.
FISCAL POLICY : The sharp recession of 1990-92 led to a record budget deficit in 1993,

encouraging the previous government to launch a deficit reduction program in 1994. This and the economic recovery has helped begin to unwind the deficit. The new government's determination to live within spending limits set by the previous government, along with the introduction of additional revenue measures in July 1997, has put the UK on a clear course to achieve fiscal balance by the year 2000. The General Government Financial Deficit was 4.0% of GDP in fiscal year 1996 (April 1996-March 1997) and is expected to fall to 1.5% in fiscal year 1997 and 0.25% in fiscal year 1998.
TAX POLICY : The new government promised during the campaign not to raise the personal

income tax rate or broaden the Value Added Tax (VAT). The bottom and top personal tax rates thus remain at 20 and 40%. The government intends, however, to strengthen incentives for work and savings, and will review the tax (and benefit) system to that end. This may produce tax reform in the medium-term. The capital gains tax is being reviewed; findings will be reported in March 1998. The main corporate tax rate was reduced in July 1997 to 31% from 33%; the small companies' rate was reduced to 21 from 23%. Labour also undertook

a controversial measure to tax the windfall gains of privatized utilities; this tax is expected to yield 5.2 billion pounds sterling over three years, which will be used to help finance the government's new Welfare-to-Work program. Other domestic tax revenue sources include the VAT (currently 17.5%) and excise taxes on alcohol, tobacco, retail motor fuels and North Sea oil production.
MONETARY POLICY: After the UK was effectively forced from the Exchange Rate Mechanism

(ERM) at the beginning of 1993, the Tory government established an inflation target as the guiding objective for monetary policy. The new Labour government has reiterated the importance of a low inflation policy. It quickly granted the Bank of England independence to set interest rates, with the aim of achieving an inflation target of 2.5%. The UK manages monetary policy through open market operations by buying and selling overnight funds and commercial paper. There are no explicit reserve requirements in the banking system.
EXCHANGE RATE POLICY : Since the UK's withdrawal from the ERM in January 1993, the

pound sterling has floated freely. Sterling's trade weighted exchange rate (1990=100) averaged 86.3 in 1996. In the first nine months of 1997, it averaged 99.6. This appreciation reflects a variety of factors, including higher interest rates in the UK than in continental Europe and possibly concerns in the market about European Economic and Monetary Union (EMU). The new Labour government has indicated it views EMU favorably, although it has also declared it "unlikely" that the UK will join EMU when it is launched on January 1, 1999. Should the government decide to pursue EMU membership, it has promised to seek approval from Parliament and from the public (either through a referendum or general election) before proceeding.
STRUCTURAL POLICIES : The UK economy is characterized by free markets

and open competition, and the government promotes these policies within the EU and in international trade fora. The UK's low labor costs and labor market flexibility are often credited as major factors influencing the UK's success in attracting foreign investment. Prices for virtually all goods and services are established by market forces. Prices are set by the government in those few sectors where the government still provides services directly, such as urban transportation fares, and government regulatory bodies monitor the prices charged by telecommunications, electric, natural gas and water utilities. The UK's participation in the EU Common Agricultural Policy significantly affects the prices for raw and processed food items, but prices are not fixed for any of these items. Over the past 17 years, Conservative governments pursued growth and increased economic efficiency through structural reform, principally privatization and deregulation. The financial services and transportation industries were deregulated. The government sold its interests in the automotive, steel, coal mining, aircraft and air transportation sectors. Electric power (except nuclear), rail transportation and water supply utilities were also privatized. Local bus transportation is in the process of privatization. Subsidies were cut substantially,

and capital controls lifted. Employment legislation significantly increased labor market flexibility, democratized unions, and increased union accountability for the industrial acts of their members. The Labour government in general is expected to continue this approach, and has launched further reviews of the regulatory systems governing utilities and transportation. Although these structural policies have achieved substantial economic results, some segments of the economy have still not adjusted. Social welfare programs and the business community are still adjusting to job losses and changes in the business climate resulting from deregulation and privatization.
DEBT MANAGEMENT POLICIES : The UK has no meaningful external public debt. London is one of the foremost international financial centers of the world, and British financial institutions are major intermediaries of credit flows to the developing countries. The British government is an active participant in the Paris Club an other multilateral debt negotiations. EXPORT

The government opposes export subsidies as a general principle, and UK trade-financing mechanisms do not significantly distort trade. The Export Credits Guarantee Department (ECGD), an institution similar to the Export-Import Bank of the United States, was partially privatized in 1991.
SUBSIDIES POLICIES:

Although much of ECGD's business is conducted at market rates of interest, it does provide some concessional lending in cooperation with the Department for International Development (DFID, akin to the U.S. Agency for International Development) for projects in developing countries. Occasionally the United States objects to financing offered for specific projects. The UK's development assistance program also has certain "tied aid" characteristics. The UK adheres to the OECD "Arrangement on Officially-Supported Export Credits" to minimize the distortive effects of such programs.
WORKER RIGHTS: The workers are enjoying the following rights in United Kingdom: a. The Right of Association: Unionization of the work force in Britain is prohibited only in the armed forces, public sector security services, and police force. b. The Right to Organize and Bargain Collectively: Nearly 9 million workers, about a third of the work force, are organized. Employers are not legally required to bargain with union representatives, but are barred from discriminating based on union membership. Employers are allowed to pay workers who don't join a union higher wages than union members doing the same work. The 1993 Trade Union Reform and Employment Rights Act limited that prohibition under certain special circumstances in matters short of dismissal. The new Labor Government has promised it will require union recognition where at least half the workers belong to a trade union. A white paper outlining this proposal is due early in 1998.

The 1990 Employment Act made unions responsible for members' industrial actions, including unofficial strikes, unless union officials repudiate the action in writing. Unofficial strikers can be legally dismissed, and voluntary work stoppage is considered a breach of contract. During the 1980s, Parliament eliminated immunity from prosecution in

secondary strikes and in actions with suspected political motivations. Actions against subsidiaries of companies engaged in bargaining disputes are banned if the subsidiary is not the employer of record. Unions encouraging such actions are subject to fines and seizure of their assets. Many unions claim that workers are not protected from employer secondary action such as work transfers within the corporate structure. c. Prohibition of Forced or Compulsory Labor: Forced or compulsory labor is unknown in the UK. d. Minimum Age for Employment of Children: Children under the age of 16 may work in an industrial enterprise only as part of an educational course. Local education authorities can limit employment of children under 16 years old if working will interfere with a child's education. e. Acceptable Conditions of Work: The new government has promised to establish a minimum wage, which was abolished by the Trade Union Reform and Employment Rights Act of 1993. A Tri-partite Commission is expected to make a specific recommendation in 1998 regarding the level. Daily and weekly working hours are not now limited by law, although the EU directive outlawing mandatory work weeks longer than 48 hours will be implemented soon. Hazardous working conditions are banned by the Health and Safety at Work Act of 1974. A health and safety commission submits regulatory proposals, appoints investigatory committees, does research and trains workers. The Health and Safety Executive (HSE) enforces health and safety regulations and may initiate criminal proceedings. This system is efficient and fully involves workers' representatives. f. Rights in Sectors with U.S. Investment: U.S. firms in the UK are obliged to obey legislation relating to worker rights.

U. S. A
In United States of America, public ownership plays a relatively minor role in economic activity. Sale of assets is recent phenomenon. The U.S.A. government sold roughly 7.8 billion dollars worth of public assets. The growth of privatization has been predominantly in the era of contracting cut of public services. Urban services such as waste water/sewage treatment, solid waste disposal, fire protection, garbage collection and public transportation have been contracted out by many states and local governments. The latest trend in the United States is to privatize more sensitive areas such as health and human services and public safety. The contracting out of child welfare services through competitive bidding has become increasingly popular. A number of local governments are now contracting out the management and operation of hospitals to commercial hospital chains. A survey conducted showed that 47 percent of the cities and countries had sub-contracted emergency medical service to private operators. There is a speculation that the technology of limited access highway networks with electronics road pricing system might offer scope for further privatization in the transportation sector. Now experimental programmes in Minnesota have been funded by the state for school districts to contract out to groups of teachers the task of teaching non-core subjects such as art and sciences. The following are the important features of privatization in USA : 1) The privatization in the USA has been dominated by the contracting out the services at the state and local government levels 2) The reduction in the federal support to the state and local governments and drying up of other sources of revenue were important factors for privatization in the USA 3) Another important factor of fast privatization of the USA economy has been the existence of a strong private sector and developed capital markets. There are a number of firms and contractors interested in and capable of taking over public assets and operating them.

GERMANY
The unification provided for quick political and monetary integration of eastern Germany, freeing prices and cutting state subsidies immediately after the treaty came into effect. From the beginning, East Germany had the assurance of macroeconomic stability and credibility, while liberalized prices led to instantaneous competition in goods and factor markets. This overnight subjection of the GDR to global market forces led to a grim adjustment shock. East Germanys GDP dropped by 34.3 percent in 1991 alone, unemployment skyrocketed to an uncompensated loss of 37 percent of all jobs by 19933 , and personnel turnover in high political and management positions was high. Much of the economic reasoning behind the transition was based in the assumption of a J-curve behavior of output, whereby the initial adjustment shock would be compensated in the long-run by an increase in growth. This Schumpeterian process of "creative destruction" created severe social and political strains on the East German Lnder with pervasive discontent ("post-unification-dissatisfaction" as Wiesenthal calls it), youth violence and low political affiliation.

The positive outlooks of a stable exchange currency with the proven conservative monetary policy of the Bundesbank and the political union distinguish the East German transition from other East European transitions. West Germany had committed itself to financing the unification project, spending about 4% of the GDP per year since 1991. This annual sum, slightly smaller than the Marshall plan, went into the reconstruction of the five eastern Lnder, focusing on the reconstruction and modernization of infrastructure and industry. Moreover, these transfer payments were primarily debt financed, as opposed to being financed from domestic savings, driving interest rates sharply up to obtain the necessary capital inflows. As a result, on a macroeconomic level Germany shifted from having large balance of trade and payments surpluses to being a net capital importer. In turn, this increased interest rates in other countries that needed to attract capital, slowing down their investment as well as that of Germanys4 . So while Germanys neighbors benefited during the first phase of unification from the added demand of the east, they were now paying through higher interest rates and slower growth. Thus the GDR transition cannot be viewed in isolation of the international economy. Germanys reluctance at the French demands of commitment to a monetary union was swayed by the necessity to obtain a permissive consensus to German unification. As Tsoukalis points out, "what tipped the balance was the perceived need to reaffirm the countrys commitment to European integration in the wake of German unification."5 Other international "exogenous" factors challenged the East German transition. During the first few years, it had posted growth rates higher than the west. However, with rising unemployment, the structural economic challenges of the United States and East Asia and the slow recovery of the Soviet economy (to which the East German economy had been intricately linked), East Germany stopped outperforming the west in 1997. Initially, the western models of systems replication in East Germany (promising a second "economic miracle") ignored such external contingencies, expecting rapid economic recovery from the transitional shock. Two of the essential macroeconomic elements to a successful transition had been bestowed upon East Germany by the process of unification: a stable legal system and financial support from the west. The neo-liberal J-curve argument depended fundamentally on privatization policy as a way of recovering from the initial adjustment shock by institutionalizing the profit motive and investment into the German economy. In order to establish the concept of property rights it was decided to restitute property to expropriated owners with the exception of expropriations by the Russian military between 1945 to 1949, a condition for USSR agreement to unification. Though it was hoped that this principle of restitution before compensation would encourage private investment in the east it has come under significant criticism. Eberhard Diepgen, the former governing mayor of Berlin, called it "the greatest single mistake in the unification legislation"6 . It is specifically argued that restitution hampered East German investment, because it did not adequately create a functioning real estate market, an essential factor for investment prospects. Compensation was the second option for cases when pieces of land have been combined into inseparable units. The "Act Regulating Open Property Issues Act Relating to Special Investments in the German Democratic Republic" passed in September 1990,

created a long bottle-neck procedure towards obtaining the entitlement of property. The main problems were that first, a competing claim on a piece of property prevented investment by the current owner. Second, it was also extremely difficult to distinguish between the ownership of a firm and the ownership of land, which fell under different entitlement procedures. Third the title records of firms had been ignored during the GDR regime and last, many claimants went to court when the market value of a piece of land and the compensation rate differed, making the process even more drawn-out7 . The lengthy procedures significantly slowed investment in East Germany until the Investment Priority Law of 1992 established a more streamlined procedure. The investment priority mandated that even with competing claims on a piece of land, the current holder can keep investing until the decisions is made by the local administration. It is argued that the restitution principle handed financial benefits to West Germans who were able to invest in the east while East Germans were threatened with the loss of their homes8 due to changes of entitlements. The western approach towards the establishment of property rights hence constituted a significant obstacle to eastern convergence. Corporate governance in the financial and the non-financial sectors was restructured as follows. First, the banking sector was reformed with the Bundesbank taking control of East German banking system and the Deutsche and Dresdner Banks taking over the branch networks of the former GDR state bank. This allowed enterprise restructuring to occur without the overhang of bad debt to indebted state enterprises9 . The privatized banks could focus on modernizing the financial system. The Treuhandanstalt (THA) was charged with holding of all assets of all former state enterprises in their subsequent privatization. Its task consisted of "organizing the organizational restructuring (corporatization) and transformation of the state enterprises into market actors (commercialization)."10 The mode of privatization was that of negotiated contracts between potential buyers and the THA, though some auctions occurred as well. The negotiations included commitments on employment levels, volumes of investment, and obligations to secondary tasks such as environmental reconstruction. The THA also engaged in preprivatization, i.e. in breaking down the large state firms (Kombinate). After 1992 the focus on social and developmental effect was added to the THA criteria for privatization. PrtzelThomas states the THA faced an inherent contradiction: "a market economy was to be created, basically through state planning and interventionist measures, in a country with enormous structural deficits, too few managers and entrepreneurs, and no functioning organization of interests."11 The THA is the primary target of eastern intellectuals who charged the FRG with colonization motives. This was due largely to the overwhelming representation by West German bankers and financiers in the THA. The THA procedures were established, benefited and carried through on western terms. Instances of fraud and unaccountable contract negotiations, in combination with the lack of knowledge of the industrial culture of state socialism and the lack of input of GDR political elites led to widespread discontent with the THA. Within four years, the THA privatized over 11,000 SOEs and after four years of restructuring, it closed on December 31, 1994. Nevertheless, because ownership was concentrated in the west, allegations on the THAs policies long-term negative implications on East German growth remain. On the microeconomic level, East Germanys privatization policy had several advantages compared to those other east European economies. First in management skills and adaptation to

the Western economic model, and second in accountability and understanding of accurate financial information.12 The long entrepreneurial tradition in the east, with industrialists in Dresden and Leipzig being among the strongest before WWII, and the retention of managerial staff at companies led to the quick adaptation to a western system of accountability. The THA Erffnungsbilanz (opening balance sheet) financial statements, required of companies, served not only as the valuation of individual firms but of the entire East German economy as well. Lastly, German federal laws required detailed audit reports including the cost of environmental cleanup, personnel reduction plans and the costs of restructuring, which helped significantly in lowering the barriers to investment.

JAPAN
During 40 years of unprecedented and almost unrestrained economic success, Japan caught up with and surpassed many of its competitors to become the world's second largest national economy, accounting for one seventh of world GDP. During this period, Japan built up the largest pool of world savings, amounting to 250% of its GDP, and accumulated the largest foreign currency reserves of $220 billion. Japan has also been at the forefront of a manufacturing revolution, exporting techniques of modern production which have been adopted world-wide. Against this background it is sometimes difficult to understand the abrupt change in fortune which has struck Japan in the 1990s. From being top dog in the 1980s, Japan approaches the new Millenium in an uneasy, transitional condition, confronted with a series of seemingly intractable problems of a severity sufficient to threaten even the economic and social fabric of the country. The causes of this collapse in confidence and the ensuing economic recession have been thoroughly debated in Japan and indeed throughout the world. It is not my intention to discuss them here today. It is widely recognised that to regain self-sustaining medium to long-term growth more than short-term stabilisation measures will be required. Far-reaching economic and structural reforms will have to be implemented. The more drastic the reforms, the quicker the recovery will be. The highly regulated model of economic development that brought economic success to Japan before the 90s no longer fits into todays increasingly integrated and market-driven global economy. Widespread state intervention, close and non-transparent links between the public and private sectors and weak enforcement of competition rules all contributed to Japans relative economic isolation. They ultimately produced a misallocation of resources, reduced competitiveness, raised prices, limited Japans openness to outsiders and constrained economic growth. If Japan is to regain its place as an engine of the world economy, structural reform is indispensable, as it was and still is in Europe. If implemented vigorously, it will stimulate competition, increase productivity, improve opportunities for domestic and foreign companies, reduce prices, broaden choice and increase standards of living. Our own experience with the 1992 Single Market programme bears this out. For structural reform to work, deregulation is of paramount importance. Government and business in Japan is aware of this. The Prime Minister himself and MITI Minister Yosano are on record as strongly favouring further ambitious regulatory reforms in Japan. But this political commitment has to be translated into action covering not only strategic reform but also balanced sectoral deregulation. In this context, the Japanese Government has recently decided to implement from January 2001 a restructuring of all the central government ministries and agencies. This could mean that when the current Three Year Deregulation Programme comes to an end there could be an

entirely new regulatory environment in Japan, underpinned by an effective Information Disclosure Law and comprehensive public comment procedures. There have, of course, already been advances. With regard to administrative procedures, we particularly welcome plans to introduce public comment procedures for new regulatory initiatives in Japan from next April. There have also been positive developments towards revamping regulatory structures in financial services. Furthermore, the introduction of performance-based standards across the economy is a key ingredient of reform and some sectors such as the construction industry are moving in this direction. Having said this, a very great deal remains to be done to make Japan an open, transparent and competitive economy.

NEW ZEALAND
Over the last 14 years, the New Zealand economy has been through a very wide range of economic reforms. Within New Zealand, there is still some debate about whether the reforms have worked, but certainly the reforms have been very beneficial for New Zealand. To describe those reforms in detail, in many respects New Zealand's reforms were very similar to those undertaken by other developed countries over the same period, the extent of the reforms, and in some cases the nature of the reforms, were internationally unique. David Henderson, the British economist who spent most of the eighties and early nineties as head of the Economics and Statistics Department of the OECD in Paris, reviewed the New Zealand reforms in 1996 and commented that `the extent of liberalisation over the last 12 years places New Zealand in a class of its own within the OECD area'. He went on to observe that `in no other OECD country has there been so systematic an attempt at the same time to redefine and limit the role of government, and to make public agencies and their operations more effective, more transparent, and more accountable'. These reforms have taken New Zealand to fourth place in The 1998 Index of Economic Freedom, published by the Heritage Foundation and the Wall Street Journal, ahead of all the countries of Europe and North America. They also led to New Zealand's being ranked fifth in the Global Competitiveness Index published by the World Economic Forum in July/August 1997, behind only Singapore, Hong Kong, the United States, and Canada. Perhaps because of the extent to which the reforms have attracted the attention of newspapers such as The Economist and the Financial Times, there has been a steady procession of people politicians, bureaucrats, and journalists - from a wide range of countries, keen to know what can be learnt from New Zealand's experience. 1. There has been enormous progress in dealing with previously- persistent fiscal deficits, and are now one of the very few OECD countries running a genuine fiscal surplus (that is, a surplus without taking into account the proceeds of asset privatisation). Indeed, the financial year ending at the end of this month marks the fifth consecutive year of fiscal surplus (this one of nearly 3 per cent of GDP) and, partly as a result, the ratio of net public sector debt to GDP has fallen from over 50 per cent in 1992 to around 25 per cent currently, one of the lowest such ratios in the developed world. The latest estimate by the New Zealand Treasury is that this ratio will fall to around 20 per cent within two years. This decline in public sector debt will clearly

help New Zealand to deal with the fiscal implications of our gradually ageing population and in due course permit reductions in the total tax burden, while on-going fiscal surpluses reduce the competition for the available pool of savings, allowing interest rates to be lower than would otherwise be the case. 2. New Zealand has made great progress in eliminating inflation, in part at least because we have created an institutional structure which insulates the day-to-day conduct of monetary policy from short-term political pressures, while leaving the strategic decision about the inflation rate clearly in the hands of the elected Government.3 Measured consistently with that of other countries, New Zealand's consumer price inflation has been among the lowest in the world since 1991. 3. The country has made great progress in `getting the signals right' by eliminating quantitative import restrictions completely, substantially reducing tariffs, abolishing export subsidies, greatly improving the tax system (by introducing a no-exceptions single-rate Value Added Tax, abolishing wholesale sales taxes, reducing marginal income tax rates, and reducing scope to avoid taxes), freeing up the financial system, and reducing the distortions and inefficiencies caused by many unnecessary rules and regulations. 4. New Zealand has greatly improved the efficiency of resource use in the public sector, by corporatising and privatising many of the trading activities and by insisting on much greater accountability in the core public sector, partly through the simple expedient of introducing proper accounting principles to the public sector. (In the case of the Reserve Bank, operating costs are some 40 percent lower now than they were at the beginning of this decade, even in nominal terms, despite essentially unchanged outputs.) 5. There has been a considerable change in the relationship between employers and employees, both by opening up the economy to greater internal and external competition (which has made employers and employees recognise the extent of their common interest) and by changing the legislative framework within which industrial negotiations take place. 6. A transformation has taken place in the views of most of those close to the public policy formulation process, bureaucrat and politician alike. For example, all six political parties elected to Parliament in 1996 now support the importance of low inflation, and all but one party supports the present institutional framework within which monetary policy is conducted. All of the parties elected to Parliament except one supports the New Zealand economy remaining open to the global economy - meaning support for both a continued reduction in tariff protection and continued openness to foreign investment. As an illustration of that, motor vehicle tariffs, which stood at 55 per cent in 1981 and which have been gradually reduced ever since, were removed completely in last month's Budget with almost no political debate, despite the resultant closure of the four remaining car assembly plants and some component manufacturers.