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Eastern Europe: Visegrad Countries Also Need to Push Reforms

Washington, 27 December 1996 (RFE/RL) - The Central European nations of the Czech and Slovak Republics, Poland, and Hungary are generally viewed as leaders in the process of transition from central planning to market-based economies.

But two World Bank economists say that while these nations have come a long way, the four -- known as the Visegrad countries -- are plagued by "weaknesses" in such critical areas as property rights and contract enforcement.

Writing in the current issue of the World Bank/International Monetary Fund magazine "Finance and Development," World Bank Central European division chief Michel Noel and consultant/financial analyst Michael Borish say that to ensure the continued growth of the private sector all four "need to push forward with reforms."

State ownership is still significant in both the banking and industrial sectors in all four countries, they say, and "Poland and the Slovak Republic, in particular, need to accelerate privatization."

Without question, the two economists point out, these four countries have led the entire region in opening up the private side.

The Czech Republic has seen its private sector increase from 11 percent of GDP (gross domestic product) in 1989 to about 60 percent in 1995. Private sector employment jumped from 16 percent of the work force in 1989 to 65 percent in 1995, with the number of private jobs estimated at about 3.2 million.

In Hungary, the private sector share of the economy climbed from 20 percent in 1989 to 70 percent of GDP in 1995, with about two thirds of the Hungarian labor force now working in the private sector.

In the Slovak Republic, the private sector share of GDP rose from 27 percent in 1991 to 62 percent in 1995 while private sector jobs nearly quintupled from 1990 to 1995, reaching 1.2 million.

And in Poland, the private sector share of GDP rose from 28 percent in 1989 -- the highest in the region at the time primarily because of private agriculture under communism -- to just 59 percent in 1995, with the private sector accounting for 66 percent of the country's labor force in 1995, compared with 47 percent in 1989.

But even in these successes there are problems.

In Slovakia, for example, private sector growth has been concentrated in one sector of the economy -- services -- and in just one region -- Bratislava. They say that private sector growth since 1994 has been "slowed by policies that, despite the growth of export industries, have encouraged a gradualist approach to privatization."

In Hungary, they say, private sector growth is also primarily in the service sector and that now nearly 75 percent of Hungary's GDP is generated by financial, legal, consulting, tourism, entertainment and other "nonmaterial" services.

The economists say that private sector growth in Hungary has been "stunted" by high tax rates, high inflation and heavy government borrowing.

Overall, the economists say the Visegrad countries have made progress in equalizing the status of private and public property and improving protection of property rights. However, they say, "property rights continue to be undermined by tenancy laws that restrict the rights of property owners, incomplete property registries and weak legislation governing collateral."

They write that in all four, "tenancy laws distort rental markets and make repossession of mortgaged property difficult." Title to urban and agricultural property is "often uncertain because of incomplete and inaccurate records, multiple pledges on the same property, and unsettled claims arising from demands for restitution and from transfers" among state entities.

Similarly, say the economists, all four countries have improved their commercial codes, but that "institutional weaknesses" such as a shortage of adequate courts and underdeveloped procedures for the private resolution of contract disputes, are undermining contract enforcement.

The flow of credit to the private sector has also been "mixed" within the four nations, say the economists. New lending to the private sector is growing, although public sector borrowing is growing faster in all except the Czech Republic, where the private sector got 65 percent of total outstanding credit in 1995. In Hungary, Poland and the Slovak Republic, on the other hand, private sector credit was at the low end of the scale -- between 32 and 46 percent.