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China: Europe's Transition Economies Teach Key Lessons

Hong Kong, 19 September 1997 (RFE/RL) - World Bank President James Wolfensohn says China's leaders are drawing some very important lessons from Russia's experience in transforming from central planning to a market economy. "It's been the subject of discussion in the recent party meetings in China," Wolfensohn told a press conference in Hong Kong today.

What has been the object lesson from the reform process in Russia and the other transition nations in Central and East Europe and Central Asia, says Wolfensohn, is the need to make sure the social-welfare system -- the social safety net -- is in place and working before jumping into privatization.

"The problem that none of us fully addressed -- what we missed or didn't give adequate attention to," said Wolfensohn, is that in a socialist economy "everybody has a certain measure of social underpinning."

They may not have gotten a great salary, but they at least got a salary, said Wolfensohn. They may not have had a decent pension, but they did get a pension. The same is true with health care, education, and even culture. It was at a level "not acceptable to the people because they wanted a different system," he said.

However, said Wolfensohn, along came the transition and the government began to privatize state enterprises, as all the western experts and organizations, including the Bank and the International Monetary Fund (IMF), recommended.

The advice was correct, says Wolfensohn. They had to make their industry competitive, and that meant closing mines and closing steel plants. They had to cut state subsidies to inefficient, unprofitable, grossly over-staffed state enterprises to make them restructure or die. Mostly, they needed to take them off the government's budget.

What the western experts didn't fully understand is that in most parts of the country, all the social services for the people were supplied through those old, inefficient state enterprises. Everything.

When the plants and mines closed, so did all the social services from health care to day care, from paychecks to pension checks. Everyone quickly learned, said Wolfensohn, that "if you don't take adequate care in the transition, your pensioners, the old people, the coal miners, the people out of work -- have nothing. The thing that was underestimated in all the transition economies is that social underpinning," said the bank president.

Wolfensohn says that is why the World Bank now concentrates 80 percent of its lending in Russia and the other transition nations on social functions.

"The test for the Russians and all the other transition economies is to keep the movement going WITH social stability," said Wolfensohn. And Russia has been "very tested" on social stability as it continues through the reform process, he added.

Another area of concern which the Chinese are watching is what Wolfensohn calls "dis-junctions -- some people getting very rich and some people not rich at all." The World Bank reports on China into the next century, released this week, warned Beijing to address the growing disparity in incomes.

Wolfensohn says this growing gap between the rich and poor has happened in many other nations, including the United States, and it is to some extent a part of the transition process. However, he said, "we need to focus on this social fabric in a way we've not done as adequately before."

Wolfensohn said he'll review all these matters when Russian First Deputy Prime Minister and Finance Minister Anatoly Chubais during the annual Bank and IMF meetings in Hong Kong. Wolfensohn praised the economic reform team led by Chubais as "the most outstanding economic team" Russia has yet had.

It has been a pretty tough job for Russian leaders, with little preparation. But, said Wolfensohn, he is now "rather optimistic" about the country's future.