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Cities in the Transition Economies
Robert M. Buckley Federico Mini
Infrastructure Sector Unit Europe and Central Asia Region The World Bank Washington, D.C.
Copyright © 2000 THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 2000 The opinions expressed in this report do not necessarily represent the views of the World Bank or its member governments. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. ISBN 0-8213-4805-1 Library of Congress Cataloging-in-Publication Data Library of Congress Cataloging-in-Publication Data has been applied for.
Table of Contents
ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 INTRODUCTION AND OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 I. TRANSITION ECONOMIES HAVE A DIFFERENT SET OF URBAN PROBLEMS . . . . . . . . . . . . . . . . . . . . . . . . 9 A. BACKGROUND: CITIES IN THE SOCIALIST ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 B. URBANIZATION IN TRANSITION ECONOMIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 C. RESOURCE ALLOCATION WITHIN TRANSITION CITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 D. POVERTY IN CITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 II. PRINCIPAL CONCERNS IN CITY MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 A. WHO PAYS FOR URBAN SERVICES IN SUCH A SYSTEM? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 B. INSTITUTION BUILDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 C. THE SAFETY NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 III. THE WAY FORWARD FOR TRANSITION CITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 A. URBAN POVERTY AND THE SOCIAL SAFETY NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 B. INSTITUTIONS AND THE PRICING OF URBAN SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 C. PRIVATE SECTOR DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ANNEXES ANNEX A. ANNEX B. ANNEX C. ANNEX D. FIGURES FIGURE 1. FIGURE 2. FIGURE 2A. FIGURE 2B. FIGURE 2C. FIGURE 3. FIGURE 4. FIGURE 5. TABLES TABLE 1. TABLE 2. BOXES BOX 1. BOX 2. BOX 3. RECESSION IN TRANSITION ECONOMIES—HISTORICAL PERSPECTIVE . . . . . . . . . . 31 URBANIZATION AND INDUSTRIALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 URBANIZATION AND GROWTH ESTIMATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 HOUSEHOLD EXPENDITURE PATTERNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 PATTERNS OF URBANIZATION AND GROWTH IN TRANSITION ECONOMIES AND MIDDLE-INCOME COUNTRIES, 1960-1990 . . . . . . . . . . . . . . . . . . .11 POPULATION DENSITY PATTERNS IN SELECTED CITIES . . . . . . . . . . . . . . . . . . . . . . . .13 DENSITY IN SELECTED WESTERN EUROPE CITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 RESIDENTIAL DENSITY PATTERN IN SELECTED FORMER SOVIET UNION CITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 DENSITY PATTERN IN SELECTED NON-USSR FORMER SOCIALIST CITIES . . . . . . . . .14 INDUSTRIAL LAND AS PERCENT OF URBAN LAND IN SELECTED CITIES . . . . . . . . .15 URBAN/RURAL POOR RATIO IN THE ECA REGION AND THE REST OF THE WORLD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 UNEMPLOYMENT RATES IN POLAND OVER TIME BY REGION . . . . . . . . . . . . . . . . .19 HOUSEHOLD EXPENDITURES ON URBAN SERVICES IN MARKET AND TRANSITION ECONOMIES AS A SHARE OF HOUSEHOLD EXPENDITURES . . . . . . . .19 A TAXONOMY OF PROGRESS IN TRANSITION COUNTRIES . . . . . . . . . . . . . . . . . . . .25 HOUSING SUPPLY IN SOCIALIST ECONOMIES: AN ADMINISTRATIVE PROBLEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 THE ECONOMIC TRANSITION IN URBAN TRANSPORT: AN UNSUSTAINABLE GROWTH IN MOTORIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 COST RECOVERY IN URBAN TRANSPORT AND THE FINANCIAL VIABILITY OF PUBLIC TRANSPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
This report was prepared for the World Bank/IMF Annual Meetings in Prague in September 2000. It is based on a longer study of the same title that was developed and edited by Robert Buckley and Federico Mini with the assistance of Aimilios Chatzinikolaou. It was supervised by Margret Thalwitz and Ricardo Halperin, and Marcelo Selowsky provided helpful comments on a number of drafts. Background papers, chapters, and extensive inputs for the longer study were provided by James Alm (Georgia State University), Kimberley Cartwright, Uwe Deichmann and Vernon Henderson (Brown University), Samir El Daher, Grzegorz Gorzelak (Warsaw University), Ellen Hamilton, József Hegedus (Budapest University), Jeffrey Balkind, Alain and Marie Agnes Bertaud, Olga Kaganova (The Urban Institute), Christine Kessides, Raymond Struyk (The Urban Institute), Sasha Tsenkova (University of Calgary), Deborah Wetzel and Christopher Willoughby. Jennifer Francis O’Connor prepared the manuscript, gracefully managing the complexities of coordinating multiple simultaneous contributions to the work. Gregory Ingram and Christine Jones were helpful peer reviewers. Catherine Stachniak skillfully edited the report.
t has now been little more than a decade since events fundamentally changed the political, economic and social systems of the formerly socialist economies of Europe and Central Asia (ECA). The hope for a better life after the collapse of socialism has animated the peoples of this region to engage in changes of unprecedented magnitude. Great hardships have been endured by the citizens of the ECA region in the past ten years. Some of these countries have suffered civil unrest and war. All the countries in ECA have experienced economic shocks, which for some were very severe.
in these same areas. Indeed, the vulnerability of city dwellers in ECA countries is not only pronounced, but also quite distinct from the situation of urban inhabitants in other parts of the world. In more than half of these countries, the urban poor account for the majority of those who live in poverty. This is in contrast to the situation globally, where less than 15 percent of the countries have a greater number of urban poor than rural poor. Furthermore, for the region as a whole, the urban poor are twice as numerous as the rural poor. Elsewhere in the world, this ratio is inverted; there are nearly three times as many rural poor as urban poor. The causes of poverty in urban areas in the region still need to be thoroughly examined because a better understanding is critical if the problem is to be successfully addressed. The paper argues that management and development of cities in transition economies deserve increased attention, both within the countries of the region and in the international community that seeks to support their development. Poverty reduction being the over-arching mission of the World Bank, it is imperative for us to focus on the dimensions of urban poverty in the transition economies.
The transition has made manifest the inefficiencies and waste of the socialist system. One of the side effects of this development has been a decade of declines in output for the region of the order of 4 percent per year. Of the 27 countries in the world that had output declines for the entire decade of the 1990s, 21 were in the ECA region. Poverty and deprivation have increased dramatically in this part of the world. Nevertheless, remarkable progress has also occurred in other spheres, and the structural changes that have taken place give reason to expect a better economic performance in the years ahead. Civil liberties and democracy are taking root in many of the ECA countries and new opportunities are being created and exploited as the region opens to the global economy. Several countries are preparing to join the European Union (EU) within the decade. In fact, during the past year, twenty-one of the ECA countries experienced increases in GDP, thus lifting the growth rate of the region to 1.7 percent. In about one-third of these countries, the foundations for lasting and equitable growth are quite robust as they enter the twenty-first century. For most ECA countries, however, the transition process remains fragile. Cities, and the policies that affect them, play a major role in building a market economy and in achieving stable and equitable growth. Three hundred million of the 450 million people who live in the ECA region reside in cities and towns. The lion’s share of the region’s GDP is produced in urban areas, but a very high proportion of the poor live
A UNIQUE SET OF URBAN PROBLEMS
Coping with the effects of rapid urban growth is a major challenge for all developing countries, whether they have urbanized rapidly in the past two decades, or are in the process of rapid urbanization today. In most ECA
From Commissars to Mayors: Cities in the Transition Economies
countries, however, increased urbanization will not happen. In these countries, and particularly in the former Soviet Union, urbanization has for decades been driven by a forced industrialization policy, rather than being the productivity-led, spontaneous trend that characterizes economic development in most of the world. Indeed, it may be argued that many transition countries are over-urbanized. Furthermore, in many cases over-populated cities were designed to service economies which were both over-industrialized and under-provided with services. With 67 percent of the region’s population living in cities, ECA is a close second behind Latin America as the most urbanized region among the Bank’s borrowers. Russia, which has a per capita income of about one-tenth that of the United States, has the same level of urbanization—74 percent—which increased from only 17 percent in the late 1920s. Clearly, the traditional relationship between income growth and urbanization applies neither in Russia, nor in many other countries of the region. The industrialization that socialist policies emphasized required increased urban populations of workers. These policies led to higher rates of industrialization and urbanization, but not to higher productivity or a significant services sector. Thus, with some exceptions, ECA countries today have achieved a level of urbanization similar to that which prevails in the Organisation for Economic Co-operation and Development (OECD) countries, but without the concomitant wealth that had been generated by higher productivity in those countries. The exceptions lie primarily in Central Asia, which exhibit population distribution patterns that are more similar to those of developing countries in other regions. But, even in these countries, the service sector was suppressed and employment was dominated by large public enterprises. It follows from the above that urban policy issues in the ECA transition economies are quite different from those of the Bank’s developing country clients and go well beyond the problems of managing largescale rural-urban migration.
created the greatest distortions and inefficiencies. The loss of employment has meant outright deprivation for millions of citizens in the cities and towns of the FSU. In contrast, in Central Europe, where the effects of socialist policies were most attenuated, rural poverty exceeds urban poverty, but by a smaller margin than in developing countries. The experience of Central Europe seems to indicate that the effects of socialist policies were less severe. In addition, and perhaps more important, economic recovery in these countries has had a stronger influence on the reduction of urban poverty than of rural poverty because the effects of increased employment from new sources of growth favor the urban-based services sector. The post-war Balkan countries have roughly equal levels of rural and urban poverty. The conflicts that these countries have suffered have created migration into urban areas. These countries, including Albania, are the only in ECA that are currently urbanizing. The incidence of urban poverty is highest in secondary cities of the ECA region. The case of Tajikistan, a predominantly rural country, is an example of a country where poverty concentration is in medium-sized, secondary cities. In these ancillary, often highly industrialized urban areas, the incidence of poverty is about twice as high as it is in rural areas, while in the capital, Dushanbe, the level of poverty is lowest. Similar findings exist for several other countries. The secondary urban areas have often been most exposed to the effects of economic decline because the largest cities not only have received more domestic and foreign investment, but they also have had access to better services and supply by virtue of being in or nearer to decisionmaking centers. In addition, the secondary cities do not even have the advantage of producing their own food. Although a plot of land and the growing of subsistence food offers some relief to rural dwellers, such options are much more limited for the poor in urban areas.
PRINCIPAL CONCERNS IN CITY MANAGEMENT
What can the leadership of cities do to cope with the changed circumstances in urban areas? There are at least three systemic issues that urban policies in transition economies must address: (i) allocating resources efficiently—embedded in the move from central planning to market pricing of production factors; (ii) managing social safety nets—embedded in the transfer of responsibility for delivery of social services from state enterprises to local authorities; and (iii) building strong local institutions— embedded in the changing role of local authorities from that of being responsible for executing central planning to that of being accountable to local citizens for management of municipal assets.
POVERTY IN CITIES
Excessive urbanization, coupled with a sharp decline in industrial production associated with the closing of industrial enterprises, is the main factor behind the high incidence of urban poverty across ECA. Large-scale manufacturing collapsed at a much faster rate than small-scale, often service-sector related, firms emerged. The result has been increasing unemployment, under-employment and poverty. Urban poverty and economic decline are most pronounced in the FSU, where socialist industrialization policies were implemented longest and deepest, and therefore
Resource Efficiency in Transition Cities: Socialist investment policies have shaped cities in ways that are highly inefficient from an economic perspective. Cities have developed according to detailed master-plans in which prices for land, capital, services, and labor did not play an important role in the determination of policy. The price of land, for example, which varies by more than 100-fold in market economies, was ignored or suppressed. Similarly, the service sector, which is so vital to urban economic growth, was suppressed and accordingly, accounted for a much smaller share of economic activity. Finally, investment policies often produced an existing stock of urban assets that was more than sufficient to accommodate the needs of these cities’ populations. However, a major portion of these assets has been poorly managed, resulting in low productivity and in waste of energy, water and space in prime locations. This misuse of resources will continue as long as economic and legal activities are impeded by weak or non-existent institutions. Unenforceable property rights, high legal costs, restitution claims, inappropriate zoning policies, continued production at money-losing state enterprises and environmentally damaged sites are among the key factors that impede a rapid shift in land use patterns and the emergence of an efficient, labor-intensive service sector. They are also the factors that prevent the sometimes large “informal economies” from coming afloat and contributing to the formal economy. These same factors have also left open opportunities for corruption of municipal officials. At the same time that space in urban centers was underutilized, socialist policies often required people to live at the periphery of cities. The location of residents on urban peripheries necessitated more extensive transportation facilities to enable mobility between home, work and school, as well as increased infrastructure to provide residents with such essential services as water, sewerage and access to social facilities. Local institutions are now challenged to provide these services with enhanced efficiency, to adjust supply through rehabilitation, to restructure and to reevaluate the pricing of services (most water systems, for example are over-designed and water waste is incredibly high), and to overhaul completely the legal and regulatory framework that governs municipal development, so that competitive markets and the supply of services can grow. To date, only a few cities have attempted to formulate a longerterm strategy that would enhance new sources of economic growth and would arrest the deterioration of urban service delivery and housing. In their new roles as managers of market-driven cities, however, local governments must facilitate the growth of
new private-sector led employment opportunities. They must embrace the 20 to 30 percent of GDP in the underground economy so that it can be both more productive and less a source of corruption and rent-seeking. There is much that they can do to expand the availability of land, improve the functioning of real estate markets, and facilitate the establishment of private businesses by reducing regulatory roadblocks. In the long run, encouraging private sector development is almost certainly the most substantial contribution these officials can make to solving the difficulties of the transition to a market economy. Social Safety Net: Under socialist rules, employers, usually state-owned or “socially owned” (as in the former Yugoslavia) institutions, were responsible for providing a broad range of social services to their employees, ranging from vacation facilities to health services and clinics. With the closure or rationalization of these firms, this system has collapsed and many of these functions have been transferred to local authorities. Needless to say, local leadership cannot cope. They lack the resources, the skills and the authority to manage an effective social safety net. Given both the magnitude of the expenditures involved and the comparative advantages of different levels of government, the national government should most appropriately assume this fiscal responsibility. Local authorities’ principal role ought to be to implement policies in the most critical areas of health and education, concentrating on efficiency gains through local decision-making and administration. Overall policy, however, meaning the responsibility for funding, and setting of standards should be determined at the national level in order to ensure consistency and equity. Similarly, the national government should guide local authorities’ role in unemployment compensation. Local governments should assume, however, broader responsibility for public kindergartens, orphanages and similar functions. Institution Building: Cities need institutions that are stronger than those they inherited from socialism in order to be fully accountable in their new roles managing assets, creating conditions for new employment and achieving social development targets. Creating this capacity will take time and require guidance and in some cases technical assistance. Much of the institution building in cities will be determined by national policy. Yet, the success of structural reforms will ultimately be determined by local leaders’ willingness and ability to follow through on mandates. There is no single model that could serve in determining the framework to guide the complex process of local capacity building, which must also vary according to location. Such countries as Poland, Hungary, Estonia, Slovenia and Latvia, where economic reforms have progressed more rapidly,
From Commissars to Mayors: Cities in the Transition Economies
have stronger, more transparent local governments. All of these countries are oriented toward accession to the EU. At the other end of the spectrum are Ukraine and Central Asian countries, where decentralization and transfer of more decision making to local levels has been supported to a much lesser extent by national policy. There are, however, specific areas of policy that fall universally within the competence of local institutions. Among them is the regulation of real estate development and housing markets and the encouragement of a healthy business environment. Municipalities still own sizeable portions of urban land, from 30 percent in the central areas of Warsaw, to 75 percent to 80 percent or more in cities of the FSU countries, such as Samara and Pskov in the Russian Federation. Most of this land should be put on the market, so that private investors can establish small businesses and new service industries. Budapest, Prague and Warsaw have taken the lead among metropolitan cities in making these adjustments. Secondary cities are following (Poznan, Ostrow Wiekopolski, Wroclaw, Gdansk, Tatdbanya, Gyor). It is worth remembering that socialist law did not have the legal concept of “real estate.” Developing this legal basis for transactions, and introducing the tools of efficient real estate management should be high on the agenda for institutional development in ECA cities. Excessively restrictive regulations on land use, particularly in high value city center locations, contribute to distorted prices for residential and commercial real estate, leaving opportunities for rent seeking by local officials. Similarly, lengthy and costly licensing procedures and exorbitant taxes squeeze new and potential entrepreneurs out of markets. Today, cities in ECA need the institutions that regulate zoning and actually support the establishment of new businesses and better housing because they rationalize land use. These cities also need stronger institutions to manage the provision of urban services to bring water, energy, sewerage, transportation, health, education and social services to residents in a more efficient and cost effective way. And, finally, these cities need the institutions that facilitate the growth of new businesses and help create employment, thereby preventing economic distress. All those local institutions that help enable better housing, more vibrant commercial activity, increased employment and more effective delivery of services create a healthy economic environment where the likelihood of poverty is greatly reduced. The management of these public and private assets and services cannot be governed effectively by city administrations unless these institutions, in turn, are supported and safeguarded by a set of laws that are consistently and equitably enforced. At times,
this basic legal framework must be developed from a very thin base.
PUTTING REFORMS IN CONTEXT
Local authorities in all transition economies are clearly challenged by the necessity to adjust to market conditions and to expanded responsibilities associated with the process of decentralization. At the same time, they are often coping with high unemployment and economic distress. They know that the services they provide are under-priced and of poor or rapidly deteriorating quality. They know that higher charges cannot be easily afforded by many of their citizens, and as newly elected leaders, they are often reluctant to make unpopular decisions. They are very concerned about the creation of new employment opportunities, but they lack, in most cases, the tools and the experience to develop a longer-term strategic framework for city development. They are often keen to get greater private sector involvement in the responsibilities of service delivery, but they may have encountered difficulties in negotiating with potential investors or service providers. Indeed, they realize that they must involve the private sector to a much greater degree because they face extremely tight budgetary constraints. What, then, can they do? Poverty Alleviation and Intergovernmental Relations: First of all, the dimensions of urban poverty in the region need to be recognized. As discussed in Section II, urban poverty is a systemic by-product of the transition process. It is extensive, in many places it is still increasing, and it requires considerably greater attention. Indeed, without greater priority being given to protecting the urban poor from the effects of transition, it is likely that many urban policy reforms will be impeded by the prospects of high social, and therefore political, costs. Urban poverty is much more than a local government concern. Greater involvement of all levels of government, as well as the international community, is urgently needed to prevent the effects of the transition from hobbling the economic success of the ECA countries. In order to avoid the conditions that can perpetuate the decline of urban living standards, local authorities must find sustainable solutions jointly with national governments. Perhaps the highest priority is to rectify the many irregularities in the interaction between central and provincial layers of government. Many problems stem from poorly defined domains of responsibility at each level, and also from arbitrary, untimely resource transfers that result in a mismatch between resources and responsibilities. As these nations strive for greater democracy, voters have the right to know whom to hold accountable. Stable fiscal transfer
systems and greater local autonomy within an agreed legal framework are needed to facilitate local revenue generation, to encourage investment, and the growth of formal sector economic opportunities. Without these methods of achieving transparency and efficiency, sustainable and equitable growth cannot be attained. Maintaining the Capital Stock—Prices and Subsidies: In most cities in the region, it is better maintenance, rather than expansion of the capital stock, that is needed. But for this maintenance to take place, financial discipline needs to be enforced. At present, the provision of infrastructure services in many cities faces major problems due to failure to collect payment on time. Often public sector users and public enterprises are the worst culprits. A change from the vicious circle of under-maintenance and lack of cost recovery is imperative to avoid service collapse. Improved financial discipline however, is not enough. Price increases, and sometimes large ones, are also needed. Such price increases are likely to have a major impact on the poor, those who cannot afford an adequate consumption of services without some support by the state. The development of such markets must, therefore, be accompanied by a much better system of targeting subsidies for housing, electricity, heating, water and transportation. There is also a demand for further research to find better ways of fine-tuning price liberalization across sectors that achieve the objective of greater efficiency while protecting the most vulnerable sector of the population. When these implicit transfers exceed those on the most basic parts of social expenditures, better targeting mechanisms should be among the highest priorities of national and local policymakers. Although the initial political costs of stronger efforts at cost recovery and targeting of subsidies may be high, there is considerable evidence worldwide that the resistance to such change will diminish once the general public sees the benefits of efficient resource management coupled with sensible poverty alleviation measures. Social assessments almost always confirm that households are willing to pay higher prices for better quality services, even if it appears that they can barely afford to do so. The employment of private agents to help increase efficiency and quality of service supply is still only rarely used in ECA countries and is an area worthy of much more attention by local policymakers. Urban Finance: Finally, cities, like other investors in long-lived assets need access to finance, and a lively debate has emerged about access to financial markets to meet local investment requirements. In most ECA countries, however, reliance on debt finance for cities is not yet a realistic prospect. With few exceptions, domestic financial markets will take time to earn investor trust. They still lack
the depth, and local authorities lack the creditworthiness to take advantage of financial products that traditionally provide long-term resources for municipal assets. In the nearterm, municipal development funds would be a more suitable alternative, particularly in countries that are just beginning to emerge from severe transition recessions. These municipal funds could contribute to the building of the institutions that, over the longer run, would improve cost recovery. Such mechanisms are likely to be needed until considerably more progress has been made on financial sector development and local government transparency and governance. A More Comprehensive Approach: Above all, a successful fight against the sharp increase of urban poverty in ECA can only produce lasting improvements if people can find new employment. A concern with urban poverty cannot be divorced from cities’ strategies for creating a business climate that attracts private sector resources into new productive investments. The vibrancy of the informal economy that has emerged from the old system is an important contribution to overall economic performance. However, and just as important, it is not as effective as a formal economy. Informal sector merchants and workers could be much more productive if the legal system made it possible for them to work in the formal sector. In order for this stronger legal basis for economic activity to take place, local authorities must better understand the demands and needs of the private sector, and they must create their own limited, but highly important functions in support of the private sector. It is essential that they put in place a clear and transparent regulatory framework that facilitates private sector activities at reasonable cost. An efficiently operating infrastructure system is an important prerequisite; access to land and clear, reliable property rights are other critical ones. Whatever actions may be appropriate in specific cases, there is little doubt that the systemic issues that the ECA Region faces in local development can only be resolved if a comprehensive view of urban management replaces the haphazard interventions of the past. Cities will increasingly need to be run by people who resemble successful managers of corporations, that is, leaders who can develop a “business” strategy for a city, assess the physical, human and financial resources needed to implement the strategy and mobilize the support of “stakeholders” to move ahead.
WORLD BANK ASSISTANCE
The challenge for cities in the ECA region will be to overcome the legacy of inefficient asset management and weak institutions that leads to high costs, a weaker private sector and therefore to larger public financing require5
From Commissars to Mayors: Cities in the Transition Economies
ments. The World Bank can help facilitate this reform. Traditionally, the Bank has addressed these urban issues by intervening at the sector level, be it in water, energy, transportation, housing, education or health. However, this approach, which can enhance the stock of physical assets and the performance of particular activities, often does not result in a cohesive city-wide or sub-regional develop-
ment strategy. The Bank’s new product, “City Development Strategies” (CDS), aims at filling this gap. The CDS is a comprehensive approach that takes into consideration the important role of better governance in the effective maintenance and utilization of capital stock, delivery of quality services, creation of incentives for business development and building of strong institutions.
Introduction and Overview
t has now been little more than a decade since events fundamentally changed the economic and political systems of the formerly socialist economies of Europe and Central Asia.1 During this time, remarkable changes and hardships have taken place for the citizens of this region. Some of these countries have suffered civil unrest and war. All of the transition countries of ECA have experienced economic shocks, which for some, were severe. During the decade of the 1990s, the region has suffered an economic decline that is unprecedented, with average income falling by 3.8 percent per
New opportunities have been created and exploited as the region is being integrated into the world economy. Furthermore, in the past year, the outlook has improved and 21 out of 27 of these economies have experienced economic growth making the overall growth rate for the region positive. Moreover, in about one-third of these countries, the foundations for sustainable and equitable growth appear quite robust. For most of the ECA countries, however, the transition process remains fragile and a great deal remains to be done. The objective of this paper is to consider one important part of this transition process: the role that urban policy has played and continues to play in the move to market-based economies. That is, to review the lessons that have been learned about the way in which changes in urban policy have contributed to or delayed the
year.2 Of the 27 countries throughout the world that had income declines throughout the 1990s, 21 were in the ECA region. It is true, however, that much of what was previously counted as income had not met the test of the market, and that currently there are indications of a substantial subterranean “gray” economy, accounting for as much as 30 percent of economic activity. The numbers, therefore, do not tell the whole story. The growth of unemployment and underemployment, however, are undeniable and various statistics on life expectancies, child mortality, etc. corroborate this decline in income. At the same time, despite the difficulties, remarkable progress has also occurred. Civil liberties and democracy have taken a tentative hold in many ECA countries and have been welcomed by most of the population of ECA.
Transition countries are the newly independent states of the Former Soviet Union (FSU) and Central and Eastern European (CEE) countries. The FSU consists of 15 countries: Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. The CEE comprises 12 countries: Albania, Bulgaria, Bosnia and Herzegovina, Croatia, Czech Republic, Hungary, Former Yugoslav Republic of Macedonia, Poland, Romania, Slovak Republic, Slovenia, and Federal Republic of Yugoslavia. The World Bank’s Eastern Europe and Central Asia (ECA) Region covers the 27 countries above, plus Turkey. See Annex A for a review of the different circumstances and transition experiences. 2 Source: World Bank Development Indicators Database. In what follows, figures reported come from this source unless noted otherwise. While economic performance in the last decade was extremely weak in these economies, it is important to note that this weak performance often followed similarly weak longer-term performance. For example, one measure of the long-term effects of the socialist system can be made by comparing the situation of some transition economies to that of similarly situated economies at the beginning and end of the reforms. According to Maddison (1995), in 1950, the per capita incomes of Poland, Hungary and Czechoslovakia were all above those of Greece, Spain and Portugal. In fact, the average of the first three countries was 20 percent higher than the average of the latter three. In contrast, in 1992, the average of the three transition countries had fallen to slightly more than 50 percent of the average of the latter three countries.
From Commissars to Mayors: Cities in the Transition Economies
transition to more democratic, higher-growth economies. Such a review is important because these cities now face a unique set of problems relating to their long-term role in an industrialization strategy that did not rely on resource costs or local accountability. These problems, in turn, affect both the nature of the transition process and the location of a large proportion of the region’s increasing poverty. Indeed, because ECA transition countries are so highly urbanized—300 million of the region’s 450 million people live in cities—the urban dimensions of regional poverty are an important aspect of the economic distress that has taken place. In the region’s transition countries, unlike the situation in any other region of the world, the poor typically reside in cities. Consequently, urban poverty is an area that requires increased attention by both the governments of the region and the World Bank. Thus, a main objective of this work is to trace the historical circumstances that affect the way cities in transition economies function. An important secondary objective is to show the effects that these historical circumstances have on the opportunities and concerns that exist for policymakers. In order for urban policy to contribute to sustainable growth and poverty alleviation, these circumstances need to be clearly understood.
THE PLAN OF THE STUDY
The next section discusses the fundamental differences between the initial conditions in the region’s transition economies and those in other countries. It focuses on how these differences affect the ability of cities to manage the transition and shows how these differences result in a quite distinct set of opportunities and concerns. It considers the
effects that socialist planning had on the distribution of population across cities and within cities, respectively, then it reviews the implications of these conditions for urban poverty. The second section of the paper considers the principal concerns for city management that are implied by these unique urban problems. It asks what the leadership of cities can do to cope with the deterioration of living standards in urban areas that has already taken place and to avoid the potential that such deterioration, if unarrested, could result in social and environmental conditions similar to or worse that those seen in the large urban conglomerates of the developing world. There are at least three systemic issues that urban policies in transition economies must address: (i) allocating resources efficiently—embedded in the move from central planning to market pricing; (ii) managing social safety nets—embedded in the transfer of responsibility for the delivery of social services from state enterprises to local authorities; and (iii) building strong local institutions—embedded in the role of local authorities changing from that of being responsible for executing central planning to that of being accountable to local citizens for the management of municipal assets, and for the creation and maintenance of incentives that will allow the private sector to prosper and grow. The third section provides proposals for action. It discusses the policies that can help achieve a more equitable, sustainable economic environment taking into account the historically unique features of urban development in the region. This section then goes on to identify priorities and strategies for the region and for the World Bank.
I. Transition Economies Have a Different Set of Urban Problems
A. Background: Cities in the Socialist Economy
t is not much of an over-simplification to say that the socialist development strategy was based on rapid industrialization and strategic investments chosen by planners (Kornai 1992). The system mobilized resources to fund the investments that planners believed would support a rapid industrialization process. At the same time, the system ensured that investments competing with those targeted by the plan did not receive funding. Private housing production, for example, was long proscribed in the FSU, with the result that, by 1941, the housing stock accounted for about 25 percent of
fixed capital investment, compared to 60 percent in 1928.3 There were, of course, large variations in this system. Many of the Eastern and Central European cities operated outside the strict ambit of the planning mechanisms of the FSU. Investment in these cities was less constrained than that in the cities of the FSU. Nonetheless, the base of these economies and their major cities was designed to serve the broader economic specialization assigned by the Soviet system. Although the plan was implemented with more flexibility and independence in such countries as Hungary and the former Yugoslavia, urban policy was still broadly dictated by central planners. In addition, some countries in the FSU, the Kyrgyz Republic for instance, were developed according to highly specialized plans that resulted in over-industrialization with low levels of urbanization. Finally, Albania, the country that began the reforms with the region’s lowest per capita income, operated in an economic system that was outside the broader FSU system. As summarized in Annex B, Albania followed a development strategy that was quite distinct from most other transition economies. It had urbanization and industrialization patterns that were more similar to those of the typical developing country. In this kind of system, households saved very little out of their current income because the state provided pension income, free medical services, education, and housing. Most transportation services and utilities were also provided essentially for free, or at prices that were more likely to reflect just the administrative costs of providing the service rather than the full resource costs. In Russia, for instance, these policies resulted in lower household expenditures on housing than on vodka and cigarettes (Renaud 1995). In the socialist system, the state controls over takehome pay and consumption levels meant that household savings as well were centrally planned, rather than being the household’s choice. These savings were collected by the government, which used them to undertake capital investments. As a result, the financial system, according to Long (1999), served merely as an accounting device that balanced sectoral cash flows. The financial system certainly was not used as a way to allocate risks and resources among alternative investments. Given their “investment hunger” (see Kornai, 1992), socialist societies collectively had high savings rates. This saving, however, was actually the government confiscating surpluses and reallocating them according to central planning. This was not a case of intentional
Moorsteen and Powell (1966), p.92.
From Commissars to Mayors: Cities in the Transition Economies
saving by households, enterprises, or sub-national authorities—and markets did not exist to allocate savings across different investments. For enterprises, the pattern was similar. Enterprise location was dictated largely by the objectives of the plan and its implementation. For example, the costs of transportation and real estate prices provided no incentives to change location in order to exploit agglomeration economies or to signal the desirability of shifting locations. As shown by Anderson and Willoughby (1999), rail freight intensity in Russia was more than ten times greater than that in France, Germany and the U.S. Firm location was dictated by regulation, rather than by prices, the availability of labor and other factors. Andrusz (1979), for example, discusses a 1931 resolution passed by the Central Committee of the Communist Party that mandated, “All building in Moscow and Leningrad will stop as from 1932.” In 1939, the ban was extended to other large cities and in 1956, 41 other cities (as well as all towns in the Moscow oblast) were added to the list of places where it was forbidden to construct new or expand existing industrial enterprises. The same type of ban was applied in Budapest in 1950 and again, in 1960. Because prices did not influence the location of production, there was no demand for the services of developers, real estate agents, appraisers, or even for construction finance. There was, as a result, a small service sector—one that accounted for only one-third of GDP—rather than the two-thirds for which it accounts in the Organisation for Economic Co-operation and Development (OECD) countries. Indeed, the service sector was not seen as a productive sector of the economy. Similarly, because the price of energy was held far below market levels, there was little incentive to build energy-efficient buildings. Finally, there was no mechanism to ensure that scarce resources, land in particular, were used efficiently. In contrast, in market economies, similar plots of land often vary in value by a factor of more than 100, depending upon where they are located. Such large price variations transmit a powerful incentive, both to economize on land use where it is most valuable and to create a significant service sector to put these resources to use in ways that will maximize their value. At the same time that land prices imparted no economic information, the socialist transport system also shifted most of the cost of bringing goods to market away from the firms. In such a system, the location of fixed capital investments had little to do with the agglomeration economies of urbanization. To sum up, just as there were no markets for the allocation of savings, there were also no land markets or consumer services as such.
In addition to restrictions on land use, there was also wage compression, limitations on labor mobility and restrictions on the kind of industries that could be developed (Kornai 1992). Moreover, enterprise financial incentives were such that firms tended to “hoard” labor by employing more staff than was needed. There was, as a consequence, no labor market in which firms and workers attempted to “match” skills and needs over time. Finally, in this noncompetitive system, enterprises often also provided services not provided by firms in market economies. They provided a wide range of such social safety net services as childcare, schools, housing and cultural and vacation services. In this kind of highly centralized economy, the functions carried out by local government officials did not give them any incentive to attempt to exploit the comparative advantage of the public or private sector in providing services. For instance, there were no consequences if they provided too little of the kinds of service citizens wanted and were willing to pay for. They were not politically accountable to local citizens according to the norms of basic democratic standards. Local authorities were, in most respects, simply the administrative arm of the central government. To sum up, the structure of government effectively outlawed the kind of local decision-making that is used to provide about 40 percent of total public expenditures in OECD economies (Hughes and Smith 1991). In most cases, neither households, nor sub-national authorities could bid for funds from the publicly owned and controlled financial systems. Although in many countries, regional allocation decisions were not completely controlled by central planners, such decisions were still not based on a transparent system that was responsive to the preferences of citizens at any level of government. Thus, in most cities, the prices charged for urban services were nominal and what might be described as the “quasi-market” for local public investments did not exist. When the markets for such a large share of potential wealth—all real estate, a considerable portion of the service sector, most financial assets, all sub-national government investments and a significant portion of human capital— were effectively eliminated or tightly constrained, investment decisions, even those undertaken by a very wellinformed planner, were, not surprisingly, considerably less effective. This result has been confirmed by Easterly and Fischer (1994), who found that after taking into account its high investment and education level in the post–World War II period, the FSU was the world’s worst performing economy. They showed that it was a system that continu-
Transition Economies Have a Different Set of Urban Problems
ally and persistently invested heavily in projects that had very low rates of return. The system did, however, produce a more egalitarian income distribution than those of market economies (Milanovic 1998). Thus, as is well known, the socialist system (especially in its later stages, where qualitative deficiencies outweighed the initial quantitative successes) traded lower growth for increased income equality. In order to understand how urban policy contributed to this trade-off, we need to consider in greater detail the effects it had on the incentives to locate in particular cities, as well as the choice of location within those cities. The next two sections deal with these issues.
B. URBANIZATION IN TRANSITION ECONOMIES
In most transition economies increased urbanization will not necessarily be part of the development process. This conclusion reflects the fact that in many of these countries, particularly in the FSU, the existing urbanization patterns have, for many years, been driven by a forced industrialization policy rather than being the spontaneous trend that characterizes development in most of the world. As a result of these policies, in many ECA countries urban-
ization had already reached high levels by 1990 without a concomitant increase in income. In Russia, for example, urbanization had reached 74 percent, which is about the same level as in the U.S. Indeed, ECA, with an urban population of 67 percent, is the second most urbanized region with which the Bank works. Just as many countries of the region may be considered “over-industrialized,” they may also be considered “overurbanized.” These countries have a much higher proportion of their population in cities than is the case in other countries with similar income levels. Clearly, the traditional relationship between income growth and urbanization does not apply in Russia and many other countries of the region, as is shown in Figure 1. Figure 1 suggests that the urbanization rate in transition economies was significantly different from that of other countries at similar income levels. In contrast to nonsocialist economies, where urbanization is driven largely by market forces, socialist planners accelerated the process by moving people to cities more rapidly so that forced industrialization could generate faster economic development. The results that can be inferred from Chenery and Syrquin
FIGURE 1. PATTERNS OF URBANIZATION AND GROWTH IN TRANSITION ECONOMIES AND MIDDLE-INCOME COUNTRIES, 1960-1990
Percent of Population in Cities
55 B 50 1960 45
5,000 6,000 7,000 GDP per capita (1990 US$) ECA
World except low-income countries See Annex C for discussion of data and sources.
From Commissars to Mayors: Cities in the Transition Economies
(1986) indicate that for a given level of per capita income, the share of the population in cities in the region was, on average, of the order of 12 percentage points higher (the distance from point A to point B in the figure) than it was in comparator countries. In addition, and more important, largely because the industrialization strategy failed, per capita income at the end of the period was at least 40 percent lower than it was in countries that urbanized more spontaneously, as shown by the difference between points A and C in Figure 1. To get a sense of the effects of these policies, consider what this failed industrialization policy implies for employment patterns in the region. It may very well be the case that many of the workers in these over-industrialized cities will “vote with their feet” and move away from cities. In fact, this trend is now occurring in many of the metropolitan areas of the FSU countries for the first time since 1917. Even with large population increases in some cities due to nearby conflicts, the average metropolitan city in the FSU lost population between 1989 and 1997. Moscow declined by 350,000 and St. Petersburg by more than 200,000 (Rowland 1998). Similarly, in Poland positive net rural-urban migration continues, but it is now a fraction of what it was prior to the reforms. Ultimately, if the apparent trend for the FSU continues, it would be the first time that this has occurred simultaneously in the majority of the biggest cities in middle-income economies since the beginning of the nineteenth century. In sum, the urban problems of these transition economies are much more similar to those faced by OECD countries in the late 1970s and early 1980s than they are to the problems of developing countries. To place their overall experience in context, it is akin to what occurred in the city of Pittsburgh in the United States, which for many years lost population as the steel industry restructured. In the case of transition cities, however, the declines in urban employment opportunities are occurring simultaneously in many cities as the overall share of urban population declines. The traditional World Bank perspective—that urbanization will accompany, or even be a prerequisite, to realizing sustained growth—is not likely to apply in many of these countries. Urban policy problems in transition economies are quite different in nature from the problems of managing large-scale rural-urban migrations that characterize most developing economies.
C. RESOURCE ALLOCATION WITHIN TRANSITION CITIES
For many years, the allocation of resources was not based on prices. As a result, the markets for goods funda12
mentally affected by urban policies—such as the land and housing, labor, services and even savings markets—are often still not well developed. The market institutions, the legal frameworks that govern these markets and the public sector agencies that should supervise them often still need to be developed. Until these market instruments are more fully developed, the now vibrant informal sectors observed in almost all transition economies, will continue to represent the triumph of ingenuity over ineffective law, while ill-structured government institutions can limit their growth significantly, see Shleifer and Vishny (1993). Although cost recovery for urban services and urban institution building will continue to be an essential component of the development process, as it is elsewhere in the world, in transition countries there will also be a need for more basic institutions. The establishment of the basis for a well-functioning real estate market, for example, will be essential. Real estate markets will be important, because investments will, in effect, over time re-determine the physical dimensions of many of these cities. This will be the case because socialist investment policies gave these cities a unique design, one that from an economic perspective is highly inefficient. Appreciation of this is particularly important for city governments, which will need to take it into account as they plan their investment. Just as the movement to cities was planned, rather than spontaneous, so too were choices of location within cities subject to plans rather than prices. Most of these cities grew according to detailed master-plans in which prices for land, capital, and services were not determined by markets. Without having functioning land markets for a substantial period of time, socialist cities grew in peculiar ways. The developers of real estate, for instance, had little incentive to substitute capital for land by tearing down low-rise buildings closer to the city center and replacing them with taller buildings. As a result, the spatial structure of the city was very different from that of virtually all other cities, in Colin Clark’s (1951) words, “West of Budapest and East of Los Angeles.” (See Bertaud and Renaud, 1997, for an excellent discussion of the driving forces behind the development of socialist cities.) In Figure 2a, for example, the densities of three Western European cities are presented—those of Paris, London, and Berlin. In each city, the pattern is very similar: After a small area of low density, what might be termed the ceremonial city center, the density of population and buildings gradually declines with distance from the city center. The work of Mohan (1993) and Noguchi and Poterba (1994) provides further evidence of declining densities in cities of developing countries and Japan, respectively.
Transition Economies Have a Different Set of Urban Problems
FIGURE 2. POPULATION DENSITY PATTERNS IN SELECTED CITIES Figure 2a. Density in Selected Western Europe Cities
350 300 250 Density (p/Ha) 200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Distance from City Center (km) 18 19 20
Source: Alain Bertaud.
Figure 2b. Residential Density Pattern in Selected Former Soviet Union Cities
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Distance from City Center (km) Source: Alain Bertaud. 13
From Commissars to Mayors: Cities in the Transition Economies
Figure 2c. Density Pattern in Selected Non-USSR Former Socialist Cities
300 250 200 150 100 50 0
8 9 10 11 12 13 14 15 16 17 18 19 20 21 Distance from City Center (km) Cracow Sofia
Budapest Source: Alain Bertaud.
Figures 2b and 2c suggest that in at least some socialist cities outside of Clark’s geographical observatory, a different pattern of urban structure occurred. The absence of price signals and the influence of planning led to considerably less substitution of structure for a given amount of land, that is, taller buildings where the land prices—if they existed—would have been higher. The longer a city has developed without markets and the more the economic system has avoided using “shadow” land prices, even without a formal market, the more its structure departs from the spatial structure typical of the market economy cities. The difference in city structure is particularly pronounced in FSU cities (Figure 2b), which grew without markets for about 70 years. These cities often have a density pattern that is the opposite of the typical market economy city; rather than declining, density increases with distance from the city center. Central European transition cities, whose socialist era was about 30 years shorter, are much more similar to the market-economy pattern (Figure 2c). The density does decrease initially, moving away from the city center, but it rises again, creating “anomalous bumps” in contrast to the monotonic market-economy urban pattern. This feature can be explained as follows: Because the city center and contiguous areas were already built at the beginning of the
twentieth century, socialist plans affected mostly the development of the suburbs. Suburban development was characterized by a mix of large industrial estates, high-density public housing and low-density residual private housing, which still existed because of the less restrictive planning of economic life in these countries. This resulted in average low density with “bumps” at places where the public housing sector dominated. As is shown below in Figure 3, a lot of centrally located land in transition cities was allocated to industrial plants, reflecting the priority given to industrialization and the restrictions on land use described earlier. Firms had little or no incentive to shift the locations of their businesses, as is typically done in market-oriented economies. In St. Petersburg, Moscow and Cracow the amount of land used for commercial purposes was many times greater than the amount allocated for this purpose in market economies. Firms also lacked incentives to shift their locations across cities. As Henderson (1988) shows, high land values in a particular city generate incentives to move to other cities or to different locations within a city. Because prices did not influence the location of production, there was no demand for the services of developers, real estate agents, appraisers, and even construction finance. There was, as a result, no mechanism to ensure
Transition Economies Have a Different Set of Urban Problems
FIGURE 3. INDUSTRIAL LAND AS PERCENT OF URBAN LAND IN SELECTED CITIES
45 40 35 30 25 20 15
St. Petersburg Moscow Cracow New York Paris Seoul Curitiba
10 Hong Kong 5 Seattle 0 Source: Bertaud and World Bank (various studies, 1991-1999).
that scarce resources, and particularly land, were used efficiently. In contrast, in market economies similar plots of land often vary in value by a factor of more than 100, depending upon where they are located, see Mills (1998). Such large price variations transmit a powerful incentive, both to economize on land use and to create a significant service sector to put these resources to use in ways that will maximize their value. At the same time that land prices imparted no economic information, the socialist transport system also shifted most of the cost of bringing goods to market away from firms. As demonstrated in our companion study, World Bank (2000a), these policies have often produced an existing stock of urban assets that is more than sufficient to accommodate the needs of their slowly growing, or in some cases, even declining populations. A major portion of these assets, however, is simply in the wrong place. On one hand, lowproductivity activities consume large amounts of space in prime locations, distorting land markets and prices. On the other hand, because of the patterns of residential construction described in figures 2b and 2c, people tend to live at the periphery of the city. Their location demands extensive transport and other infrastructure facilities to enable mobility and to provide residents with such services as water, sewerage and access to social facilities. In addition,
because of the deep subsidies of energy these far-flung cities are also highly energy-inefficient, imposing very high energy costs on families as economies move to world energy prices. This misuse of resources will continue as long as the speed, cost and transparency of real estate transactions are constrained by a weak real estate system and as long as the price of public transport is heavily subsidized Local institutions are now challenged to provide these services more efficiently, to adjust supply through rehabilitation, to restructure and price services in response to markets (most water systems, for example, are overdesigned and consumption is high by international standards), and to overhaul the legal and regulatory institutions that guide town development. To date, only very few cities have undertaken a major effort to design a longer-term strategy to stop the decay of urban service delivery and housing. Most local authorities are unable to protect their citizens from rapidly deteriorating living conditions within present budgets.
D. POVERTY IN CITIES
The spatial structure of transition cities and the lack of development of the institutional preconditions that enable real estate transactions impede the rapid redevelopment of socialist cities. Even more important is the immediate prob15
From Commissars to Mayors: Cities in the Transition Economies
lem of the effects that these policies have had on the location of the poor. The sharp decline in industrial production and the long list of constraints on the development of the service sector, see Heller (1998), has made city dwellers in ECA countries more vulnerable in ways that are quite distinct from the situation in other parts of the world. For example, in more than half of these countries, the urban poor account for the majority of the disadvantaged. This pattern is in contrast to the situation globally, where less than 15 percent of the countries have greater numbers of urban poor than rural poor. Moreover, for the region as a whole, the urban poor are twice as numerous as the rural poor. Elsewhere in the world this ratio is inverted, that is, there are nearly three times as many rural poor as urban poor. (See Figure 4.) The pattern of urban and rural poverty in the ECA region is unique. As Figure 4 shows, urban poverty is more pronounced in the FSU than it is in ECA generally. In addition, the data in the figure mask some important regional differences: In Central Europe rural poverty is more pervasive than urban poverty, the overall level of poverty is lower there than in the rest of the region, and the difference between levels of rural and urban poverty is not as great as that in the rest of
the world. Similarly, the post-war Balkan countries do not follow the aggregate pattern depicted in the figure. The Balkan countries have roughly the same amount of rural and urban poverty. The Central European countries, which have had higher economic growth, are examples that suggest that economic growth has a stronger influence on reducing urban poverty than rural poverty, because the employment impact of new sources of growth favors the urban-based services sector. The interregional differences also confirm that the extent of urban poverty in the FSU should be a matter of immediate concern to the countries concerned, as well as to the Bank. Finally, as shown more fully in our companion report, World Bank (2000a)4 and the Bank’s Report on Poverty in the Region (World Bank 2000b), urban poverty in the region is not only very different from that elsewhere in the world, but its pattern within the region is also highly idiosyncratic. Thus, a differentiated, country-specific poverty strategy is needed. To begin with, the typical poor person in the FSU lives in a city that has yet to establish the basic institutions of local political accountability or private sector development. These are also countries that typically have little financial sector development, ambiguous and
FIGURE 4. URBAN/RURAL POOR RATIO IN THE ECA REGION AND THE REST OF THE WORLD
2.5 FSU ECA 1.5
LAC MNA SAR All but ECA
0 Source: World Bank (2000b, 2000c).
The companion report is entitled: World Bank. 2000. “From Commissars to Mayors: Cities in Transition Countries.” [Extended Version.]
Transition Economies Have a Different Set of Urban Problems
non-transparent property rights, and usually, just the beginnings of sub-national political accountability. These circumstances will not change quickly or easily and they pose the following question: How did this unusual spatial distribution of the poor come about? The Collapse of the Enterprise-based Social Safety Net: For the most part, today’s urban poverty in transition countries is a direct result of the way the old system relied upon enterprises to provide social services. Under socialist rules, employers, that is, usually state-owned or “sociallyowned” institutions, were responsible for providing a broad range of social services to their employees, ranging from vacation facilities to health services and clinics. As shown in the World Development Report of 1995, and our companion study, World Bank (2000a), with the closure or
rationalization of these institutions, this system has collapsed and many of these functions have been transferred to local authorities. These newly enfranchised local authorities are in a difficult position; they have neither the resources, nor the skills, nor the regulatory authority to manage an effective social safety net. What, then, is to be done? Perhaps most of all, the existence of the urban poor needs to be recognized. This group’s existence is a systematic by-product of the transition process. It is extensive, and growing, and it requires considerably greater attention. Indeed, without greater attention to protecting the urban poor from the effects of transition, it is likely that many urban policy reforms will be trapped in a vicious circle. The next section discusses how this problem may be addressed.
II. Principal Concerns in City Management
erhaps the most important lesson from the experience of the region’s cities so far is that carrying out consistent policies and prioritizing investments in physical infrastructure cannot be done on a piecemeal basis. These policies need to address a highly interrelated set of issues. To address these issues in a comprehensive way, it is perhaps most important to articulate objectives and to set priorities through consensus-building processes to ensure the support that will enable consistency in implementation over time. Such processes are likely to be essential for the transition cities given the multiple
challenges and rapidly changing economic contexts they face. One of the first issues that needs to be addressed is that, in most ECA countries, the role of local authorities must be clarified in the supply and management of social services and the maintenance of a social safety net. Moreover, the sheer magnitude of the expenditures involved indicate that the matter cannot be left only to local governments; national governments need to be involved. Local authorities should focus only on those key functions which they are in the best position to perform. Most important among these are: the efficient management of local assets, and the creation and maintenance of incentives that will encourage private-sector-led employment opportunities so essential for growth. In the longer term these employment opportunities will play an important role in solving the poverty problems that transition to a market economy has created. For this to happen, however, local authorities must help to develop a business climate in tune with the demands of the private sector. They must also foster a regulatory framework that facilitates private sector activities and the mobility of resources. Although such prescriptions may appear to be obvious, the following figure shows that they have not yet been achieved even in one of the most successful transition countries, Poland. Figure 5, for instance, shows that regional unemployment problems persist even in a country that has achieved sustainable growth and has undertaken extensive efforts to reform government so that it is much more accountable to local voters. In other words, the figure shows that persistent and much higher levels of unemployment continue to plague areas immediately bordering other regions with much lower levels of unemployment. This pattern suggests that labor supply is not shifting as rapidly as one would expect. Indeed, Deichmann and Henderson (2000) show that, since the reforms began, mobility in Poland has been rapidly declining rather than increasing, as would be expected. Why has this kind of pattern occurred, what role do urban policies play in it, and finally, what are its implications?
A. WHO PAYS FOR URBAN SERVICES IN SUCH A SYSTEM?
One reason that regional labor markets appear to be fragmented without converging levels of unemployment across locations, is that it is difficult to move when some of the markets needed to facilitate such moves are still restricted. For instance, Table 1 suggests how constraints on the existence and operation of various markets affect household expenditures. It reports the percentage of household budgets allocated to housing, utilities, transport and local public expenditures. These figures have been estimated from data coming from several different sources (see Annex D), and provide an approximation of actual levels. The first column shows that, on average, in market economies, a household devotes between 45 and 65 percent of its budget to these four major urban expenditure items—20 to 25 percent on housing, 15 to 20 percent on urban government services, about 5 percent on utilities, some of which
Principal Concerns in City Management
FIGURE 5. UNEMPLOYMENT RATES IN POLAND OVER TIME BY REGION
Poznan Warszawa Lodz
Katowice Unemployment rate (percent)
30 20 10
Source: Deichmann and Henderson (2000) based on data from the Central Statistical Office, Warsaw.
TABLE 1. HOUSEHOLD EXPENDITURES ON URBAN SERVICES IN MARKET AND TRANSITION ECONOMIES AS A SHARE OF HOUSEHOLD EXPENDITURES
Countries Services Housing Utilities Transportation Taxes Financing Local Exp. Total OECD 20 to 25 3 to 6 10 to 12 15 to 20 48 to 63 Pre-Reform Transition Economies 3 3 2 3 11 Most Recent Transition Economies 3 to 9 5 to 9 7 8 23 to 30
Sources: See Annex D for a more complete discussion of measures and sources.
From Commissars to Mayors: Cities in the Transition Economies
may be included in local public expenditures and about 11 percent on urban transport (user fees on public transportation, car expenditures including leasing, vehicle financing, gas, repair and maintenance).5 Columns two and three measure these expenditures in transition economies. They show that the share of expenditures is much lower than it is in column 1. On average, in transition economies, total household expenditures on urban services at the beginning of transition were only about 11 percent of income, less than one-fourth of that of the OECD economies. Since the transition began, this fig-
ure has more than doubled to an average of about 26 percent as of the late 1990s. This figure, however, is still considerably lower than that of OECD economies and it varies considerably among ECA countries. Underpriced services affect both the upkeep of urban assets, the transparency of the distribution of these services, and ultimately the ability to bid for these services in different locations. This inability to bid for such services, in turn, can restrict the ability to change locations in a number of ways. For example, Box 1 suggests that while the price of housing was low, the supply of housing was extensive. As a result, the box
Box 1. Housing Supply in Socialist Economies: An Administrative Problem
A study by Hegedus, Mayo, and Tosics (1997) provides the first comparable quantitative evidence on housing sector performance in a number of ECA countries. The approach used is derived from an examination of data on Housing Indicators that have been collected as a continuation of a process begun in 1990 by the United Nations Centre for Human Settlements and the World Bank, with support also from the United States Agency for International Development (USAID), known as the Housing Indicators Program. Surprisingly, for each indicator, the data show that housing conditions of Eastern European cities are strikingly good relative to those of comparators with similar incomes, and are, indeed, often relatively close to those of Western European cities despite having per capita incomes that are only one-eighth as high as those in Western Europe (a mean of US$2,552 for Eastern European countries in 1990, compared to US$19,792 in Western European countries in the same year). Every key indicator of crowding for the three groups of countries suggests that relative to the income levels, Eastern European cities have less crowding than do countries with similar income levels—with 40 percent more floor area per person and 77 percent more dwellings per 1,000 people than in the comparators. Similarly, the quality of the housing stock in Eastern Europe appears to be much better on average than that in countries with similar incomes. The only major exceptions are Albania, Bulgaria, Romania and Lithuania which, with the low number of their flats equipped with running water and bathrooms, are well below the average level of service for the region. Cumulatively, these comparisons suggest that when the reforms began, the housing stock in Eastern European cities was, on average, far better than what might be expected on the basis of income levels. Indeed, these comparisons, and work by Dániel (1999) suggest that in many countries, e.g., Hungary and Slovenia, the issue of housing shortage, which is frequently cited within the region, is likely to be substantiated only on the basis of expectations that have been conditioned by decades of low and distorted prices, or by a rationing system that distributed the supply with little regard to demand or distributional concerns. Their report goes on to show that although these countries began the decade with high overall levels of housing quality and quantity, there were, nevertheless, significant problems in the distribution of housing. In particular, relative to market-oriented economies, there is far less correspondence between household income levels and housing quality/quantity outcomes. Many more large households occupy small dwellings and small families large dwellings than is the case in market economies. Moreover, throughout the region, the level of upkeep and maintenance of the existing multi-family housing stock has been a serious problem that has intensified over the past decade. Maintenance expenditures are far below those of market economies, with the result that there is a significant “deferred maintenance” relative to the economically necessary normal maintenance cycles. The fact that housing production has been so low for so long throughout the region suggests that if anything, this problem is likely to have grown.
Based on Hegedus, Mayo, and Tosics (1997).
These comparisons are illustrative of relative expenditure patterns and do not represent expenditures on a similar bundle of services. The composition of the “bundles” of services is clearly very different both within and across different types of economies. The use of averages, for instance, can aggregate over very different tenure forms, financing patterns, and, even tax incentives. Nevertheless, the patterns observed in each type of economy appear to be quite similar and robust. Annex D provides a more complete listing of the data sources for the figures in the table.
Principal Concerns in City Management
suggests that even though there was probably not a physical shortage of housing, the ability to maintain and exchange this stock has remained problematic, even in advanced reformers. When such services continue to be publicly held and/or price-controlled it is much harder to move to exploit new opportunities. For example, one study of Poland by Coricelli, Hagemajer, and Rybinsky (1995), estimates that about 20 percent of Polish unemployment can be traced back to these kinds of housing market rigidities. Jobs are situated in one place and workers in another. Because of the rigidity of the housing market, migration is
constrained, with the result that unemployment across regions persists. The under-pricing of urban water and transport also continue to distort locational choices incentives and result in household expenditure patterns that compound the initial problem. For example, the pricing of urban transport services must take into account the pricing of such competing modes of transport as cars, as well as the related land-use and zoning restrictions that can play such an important role in the demand for urban transport. As Box 2 shows, in some cities existing pricing policies are con-
Box 2. The Economic Transition in Urban Transport: An Unsustainable Growth in Motorization
Throughout the 1990s, City Councils of the countries of Central and Eastern Europe (CEE) have been caught in an unenviable position. On one side, was the pent-up demand for private vehicles. On the other side, was the dependence of the majority of the population on inexpensive public transport. This pattern of urban transport assumed even greater importance in the transition period as a result of the much increased instability in employment and income. These difficulties, in almost all the ECA countries, were exacerbated by the steady withdrawal of subsidies that the central governments had provided under the old system, as well as the lack of financing for creation of a new urban transport system more balanced between public and private modes. The major cities often had very good public transport systems, which also naturally involved substantial costs, of which only a minor share had traditionally been collected directly from users. These same cities also had the largest increases in numbers of private vehicles. The following approximate figures for a few of the Region’s principal cities illustrate the growth: Passenger Cars per Thousand Inhabitants 1980-98: Selected CEE Cities 1980 Prague Warsaw Budapest Moscow St. Petersburg Bucharest 235 157 130 1990 276 190 235 70 57 100 1998 511 392 313 207 175 140 % Increase 1990-98 85 106 33 193 207 40
The large increases in transition cities in the number of vehicles—in the case of Moscow and St. Petersburg, among the highest increases in urban vehicle ownership within a short space of time that the world has ever known—put great pressure on the road network and accelerated the need for its expansion. At the same time, these increases in car usage did not reduce demand for public transport much. This is well illustrated by the figures available for Prague, which show that while total car kilometers traveled (car VKT) increased by nearly 140 percent between 1990 and 1998, use of public transport trip rate fell only 20 percent, from nearly 3.0 trips per day per capita, to 2.4. Although different cities have reacted in different ways, the common feature is that all have tried to meet the greatly increased need for transport with funding for public transport and road improvements which cannot be sustained. For instance, combined operating and capital subsidies for public transport in Prague consumed amounts varying from 33 to 41 percent of the city’s entire budget over the years 1992-98. In recent years, annual operating and capital subsidies for the public transport systems of Moscow and St. Petersburg (from both city and federal sources) have averaged about $100 for each inhabitant of those cities, equivalent to about 10 percent of each city’s budgetary expenditures. Spending on roads reached about the same level in St. Petersburg and twice as much in Moscow (largely due to work for completion of the ring road).
Source: Background Note by Willoughby (2000).
From Commissars to Mayors: Cities in the Transition Economies
tributing to some of the largest increases in vehicle ownership ever. Finally, consider the supply of water and wastewater services. Better pricing is not only important for the provision of these services, it is also necessary in order to induce a reduction in their use. For instance, as shown by Gurenko and Shakaratan (2000), in 1997, the average per capita residential water consumption in Russia was 3.3 times higher than that in the UK, while tariffs were 13.8 times lower. In Hungary, where water tariffs were closer to those in the UK (but still 3.7 times lower), water consumption was only 1.5 times higher than in the UK. In many transition countries, especially in Armenia and Azerbaijan, widespread residential non-payments further reduced the households’ water expenditure burden. Thus, as typically occurs with free or semi-free goods, low water tariffs created unrestricted demand and excessive consumption. In this regard, however, a word of caution needs to be inserted as price signals will have a limited impact on curbing demand unless each customer is metered, and introduction of metering in residential housing often faces severe technical constraints due to the way piping systems were laid out in the former socialist countries. This also applies to district heating.
B. INSTITUTION BUILDING
Cities need stronger institutions than those they inherited from the socialist system to be fully accountable for their new roles in managing assets, creating conditions for new employment and achieving social development targets. Creating this capacity will take time and require guidance. Although a few Central European countries have made considerable headway in strengthening local administrations and in instilling a sense of discipline to adjust to tight budget constraints, there is still a long way to go virtually everywhere in the region. Locally elected leadership must feel empowered to modernize the administrations they run, and they need the tools to make responsible and informed management decisions. To break out of a possibly vicious circle of continuing decline, local authorities have to find solutions jointly with national governments. Perhaps the highest priority is to rectify the many anomalies in the current interactions between central and sub-national tiers that stem from poorly defined responsibilities at each level and from sporadic resource transfers that end up in numerous non-funded mandates and moral hazard. Another important aspect of this process is the development of accountability. In these young democracies, voters have the right to know whom to reward for success and whom to blame for failure. Stable fiscal trans22
fer systems, greater local autonomy and an agreed legal framework for local revenue generation through taxation, fees and debt financing are essential for sustainable and equitable growth. The Governance and Structure of Institutions: An underlying premise in the literature on decentralization is that if local governments have better information about local preferences, they are able to respond better to constituent demands. Citizens are able to voice their concurrence or objections to a local government’s service provision through either “voice” (e.g. voting for or against a local government and participating in civil society) or through “exit” (e.g. simply moving to another jurisdiction). Such mechanisms pressure localities to be responsive and potentially to be more efficient in providing services. The key is that there must be mechanisms in place for holding local governments accountable. These mechanisms include electoral processes, as well as such civil liberties that influence local governance as media freedoms, NGO development and the basic “rule of law.” As discussed in the previous section, in the transition countries, the option of moving to alternative localities has often been restricted by weak labor and land markets and by regulatory rigidities. Methods through which communities are able to express their views and preferences are, therefore, even more important for effective implementation of any decentralization policy. Electoral processes are a good indicator of the degree of accountability of local governments: The more that free, fair and transparent elections are held the more accountable government officials will be. Data compiled in our companion study (World Bank 2000a), indicate that in most countries in the region very little transparent local political accountability has yet developed. In most countries that have a regional tier of government, the regional executives are appointed by the central government. In only a few countries are they elected. Governors in Russia are directly elected, as are executives of the vovoidships in Poland since the recent administrative reforms. If the Republican level of government in Yugoslavia (Serbia and Montenegro) and Bosnia & Herzegovina (Muslim-Croat Federation and Serb Republic) are considered a top tier of sub-national government, then these also have elected regional representatives. Most regional assemblies, however, are directly elected. There are exceptions, as in Hungary, where the representatives to the regional councils are selected by local councils. The prevalence of centrally appointed regional authorities or regional assembly candidates that are determined by the influence of central authorities, together with the fact
Principal Concerns in City Management
that many countries have no regional assemblies at all, suggests that political accountability at the regional level is actually to the central government, rather than to the citizens of the given jurisdiction. To some extent, this hierarchical accountability is a legacy of the structure of government from Communist times. It is also perceived as an important mechanism for ensuring that sub-national authorities pursue central government objectives and do not take actions that might destabilize the macroeconomic situation. Such hierarchical control precludes some of the political and economic advantages associated with decentralization. This contrasts with the situation in Western Europe, where local election of sub-national governments (regions, cities, etc.) is the accepted rule.6 The State of Civil Liberties: The present implementation of more democratic sub-national processes for the selection of leaders throughout much of the region is encouraging. Promoting the political accountability that underlies good governance (and effective decentralization of responsibilities), however, requires more than democratic elections. Other supporting elements include media freedom, the development of NGOs and other civic institutions that operate to encourage greater public participation. Similarly, the recognition of the “rule of law” requires a correspondingly low degree of corruption in public administration. Each of these plays a vital role in determining the quality of governance at any level of government, and although the available information is not specifically focused on the sub-national level of government, an assessment of conditions at the broader level is still useful in understanding the context in which local governments must operate. Based on evidence collected by Freedom House and other organizations monitoring political developments in transition countries, roughly one-third of all transition countries have achieved these standards. Of the two-thirds that fall short, half have achieved a partial degree of freedom, and in some cases, there is evidence that conditions are improving. For the remainder, the development of good governance and political accountability at all levels continues to be undermined by a failure to meet the most basic standards for freedom of expression. In sum, the transition countries are undergoing a process of political reform and reaction against a highly centralized political and economic system. In such an envi-
ronment, it is to be expected that citizens would demand a rapid decentralization of political and economic power. This is exactly what took place in such countries as Poland and Lithuania, where even though the reforms are by no means complete, they are recognized as having been instrumental in making the government closer to and more subordinate to citizens. It should also be recognized, however, that for the gains of decentralization to be tangible, a number of basic governance institutions must first be in place. Without these institutions, as Prud’homme (1995) argues, there can be significant dangers to decentralization. In a way, it may be argued that we ought to speak about two “transitions.” The first would be the one that is usually associated with the movement from authoritarian socialism to a market economy in a politically democratic environment. The second one is from centralized government to decentralized government. Both transitions have in common that they are taking place with the lack of a blueprint for guidance. In the specific case of decentralization, one of the greatest challenges for local governments is to achieve the political objective of responsiveness to the local population while lacking the capacity, experience and financial resources to deliver the services that this population expects in an efficient manner.
C. THE SAFETY NET
Above all, a successful fight against the sharp increase of urban poverty in ECA can only produce lasting improvements if people can find new employment. An urban poverty program cannot be divorced from cities’ strategies for channeling private sector resources into new productive investments. In order for this to happen, local authorities must better understand the demands and needs of the private sector, and they must develop a transparent regulatory framework that facilitates private sector activities at reasonable cost. An efficiently operating infrastructure system is an important prerequisite, and access to land and clear, reliable property rights are other critical ones. An education and training system that produces the right skills will also be an important dimension of the effort. Whatever actions may be appropriate in specific cases, there is little doubt that the systemic issues that the ECA Region faces in local development can only be resolved if a comprehensive view of urban management replaces the haphazard interventions of the past. Cities will increasingly need to be
6 The World Development Report (World Bank 2000c) provides evidence on sub-national elections in 22 out of 23 high-income OECD
countries. All of these countries held elections at the local level of either local councils or the mayor, and the 18 with an intermediate level of government all held elections at that level. 23
From Commissars to Mayors: Cities in the Transition Economies
run by people who resemble successful managers of corporations, that is, leaders who can develop a “business” strategy for a city, assess the physical, human and financial resources needed to implement the strategy and mobilize the support of “stakeholders” to move ahead. These “stakeholders” must also be vitally interested in alleviating the situation of the large numbers of poor who reside in the cities. For example, in Budapest and Warsaw average household expenditures on public transport of the lowest income quintile already exceed 15 percent of income, even though cost-recovery levels for the transport systems are low by West European standards. For these
low-income families, further cost increases would represent very difficult burdens. For the service provider, however, such fair increases are essential for financial sustainability. The result is that efforts to cushion the effect of costs on the poor can leave urban transport systems financially unsustainable. There are, however, strategies for addressing this problem. See Box 3 for a discussion of some of the issues. Ultimately, helping to enable such price increases while protecting the poor is perhaps the most important safety net issue. However, removing the barriers to the emergence of markets in housing, land, and essential services can lead to unprecedented price increases for non-tradable goods and
Box 3. Cost Recovery in Urban Transport and the Financial Viability of Public Transport
Current cost recovery levels in public transport are still generally lower than the already quite low levels typical in Western Europe. Warsaw has remained somewhat ahead of the other major cities as regards the overall rate of cost recovery—about 60 percent—and Bucharest somewhat behind, at about 30 percent, but none of the cities appears to have been able to achieve dramatic improvement, compared with the situation in the early 1990s. It is essential to break this logjam, to help fill the budget gap, to prevent further deterioration of services due to inadequate maintenance and renewals, and, not the least important, to enable sound consumer choices—for instance, about where to live relative to place of work—and hence, to guide the development of the city. In some countries, notably Russia, the problem is mainly one of exemptions, while in others, such as Poland and Hungary, it is more a question of constraints applying to overall fare levels. The key, however, to solving the problem is to identify more precisely the needs for support, and then to find imaginative formulae for providing them. Surveys indicate that, even at the low overall cost-recovery ratios presently applying, transport already accounts for 10% of total expenditure of the poorest 20 percent of households in Warsaw and 15 percent in Budapest. These numbers imply severe constraints on further tariff increases for these groups until incomes rise closer to those in other cities that have such high-quality public transport systems. In the meantime, characteristics that might warrant special assistance for transport (e.g., multiple-child families, unemployed actively seeking work) have to be defined, and people fulfilling these criteria to be provided either with additional family assistance or with subsidized travel cards, probably through the national social assistance administration. In those cases where the problem of full or partial exemptions is widespread (for instance, in Moscow the share of public transit riders paying for their ride fell from 66 percent in 1991 to 30 percent in 1997), the many exempt categories need to be reexamined one by one, as Russia has already begun to do. Hard choices are unavoidable, in determining the needy for whom peak-period travel is essential, so that free general passes may continue to be the best solution for them—until the time that general income-levels have more fully recovered, or they have moved out of the needy category. The large majority of present beneficiaries may then be subdivided into groups defined by characteristics that could help identify solutions appropriate to their particular needs: Many simply need to be removed from the exempted lists, on the grounds that they should decide for themselves how to allocate the incomes that the country can now afford to provide. Others, such as war veterans, may be given passes limited to off-peak use as a reduced, but still valued, token of esteem. Younger people may be limited to evening passes for studies and cultural events, day-time travel being expected to be by bicycle or on foot. With the costs of such specific support paid out of social assistance, or similarly, with funds for the limited categories that it is decided to treat preferentially, the general fare could then be progressively adjusted to the levels needed to cover costs, with the specific steps of adjustment chosen in light of both local wage and income trends and the adjustments that have also to be brought about in the prices of other principal public services. Raising standard fares to cost-recovery levels will require several years in Moscow and St. Petersburg, but it should not take long in most of the Central European countries. For the meantime, there would seem to be no alternative to general municipal budget resources to make up the shortfalls in the transport operators’ revenues that result from a phased approach to reaching financial viability.
Principal Concerns in City Management
services. Such price increases are likely to have a major impact on the poor, those who cannot afford an adequate consumption of services without some support by the state. The development of such markets must, therefore, be accompanied by a much better system of targeting subsidies for housing, electricity, water and transportation. There is also a demand for further research to find better ways of fine-tuning price liberalization across sectors that achieve the objective of greater efficiency while protecting the most vulnerable sector of the population. Designing such targeting mechanisms should be among the highest priorities of national and local policymakers. Although the initial political costs of stronger efforts at cost recovery and, targeting of subsidies may be high, there is considerable evidence worldwide that the resistance to such change will diminish once the general public sees the benefits of efficient resource management coupled with sensible poverty alleviation measures. Social assessments almost always confirm that households are willing to pay higher prices for better quality services, even if it appears that they can barely afford to do so. The employment of private agents to help increase efficiency and quality of service supply is still only rarely used in ECA countries and is an area worthy of much more attention by local policymakers.
Finally, cities need access to finance, and a lively debate has emerged about access to financial markets to meet local investment requirements. In most ECA countries, however, reliance on debt finance is not yet a realistic prospect. With few exceptions, domestic financial markets lack the depth, and local authorities the creditworthiness, to take advantage of financial products that traditionally provide long-term resources for municipal assets. To sum up, Table 2 provides a broad taxonomy of the progress on reforms discussed above by a number of subregions of ECA. In the table, the countries of the region are subdivided into Central and Eastern Europe (CEE), the Baltics, Central and South Balkans (CSB), and the rest of the FSU.7 The topics on which progress is measured are the three dimensions of policy identified in Section I, that is: institutions, the social safety net, and private sector development. The table indicates that CEE countries are the most advanced on policy environment followed reasonably closely by the Baltics, with both regions faring reasonably well on political accountability and the former also making significant progress on private sector development. In the CSB and the rest of the FSU institutions remain very weak and in the latter considerable progress is needed on both safety net and private sector development.
TABLE 2. A TAXONOMY OF PROGRESS IN TRANSITION COUNTRIES
Institutions Transparency Political and Economic Accountability Autonomy of Local of Local Government Government Central and Eastern Europe The Baltics Central and South Balkans The Former Soviet Union 3.0 3.0 1.5 1.0 2.0 2.0 1.0 1.0 The Safety Net Effective Allocation of Social Mandates 2.5 2.5 2.0 1.0 Private Sector Development
Pricing of Services 2.5 2.5 2.0 1.0
Effective Real Estate Markets 3.0 2.5 2.5 1.5
Financial Sector Development 3.0 2.5 2.0 1.0
Overall Rating 2.7 2.5 1.8 1.1
Note: The scale used follows that used in the EBRD Report, that is, from 1 to 4, where higher scores correspond to better performance. Source: World Bank (2000a) and European Bank for Reconstruction and Development (1999).
The Central and Easter European countries include the Czech Republic, Hungary, Poland, Slovak Republic, and Slovenia; the Baltics include Estonia, Latvia and Lithuania; the Central and South Balkans include Albania, Bosnia and Herzegovina, Croatia, Bulgaria, FYR Macedonia, Moldova, Romania, and Yugoslavia; and the FSU include the remaining countries of the Former Soviet Union. Of course, the last grouping could also be usefully subdivided.
III. The Way Forward for Transition Cities
ection I identified three areas of strategic concern for the cities of the region. They are: addressing urban poverty concerns, maintaining the extensive existing stock of capital assets, and recognizing the need for a longer-term, comprehensive and participatory perspective on city development strategies. Section II described some of the impediments to addressing these concerns. In this last section, we bring these two discussions together in some general conclusions.
A. URBAN POVERTY AND THE SOCIAL SAFETY NET
Perhaps the foremost conclusion is that first of all, the magnitude of urban poverty needs to be recognized. As discussed in Section I, urban poverty in the region is quite unlike that of other regions of the world. It is a systemic byproduct of the transition process. It is extensive, increasing and it requires considerably greater attention than it has received. Indeed, without greater priority being given to protecting the urban poor from the effects of transition, it is likely that many urban policy reforms will be impeded by the prospects of high social, and therefore, political costs. Urban poverty is much more than a local government concern. Greater involvement of all levels of government, as well as the international community, is urgently needed to prevent the effects of the transition from hobbling the economic success of the ECA countries. The instruments that are now typically used to address these concerns—largely locally unfunded social mandates—are both inefficient and unsustainable. Urban governments are simply unable to shoulder the costs of collapsed safety nets. Indeed, perhaps the clearest guideline on effective divisions of governmental responsibilities is that distributional policy should be undertaken at the national, rather than local level. This guideline is more frequently violated than followed throughout the region. Second, it needs to be recognized that the most important role local governments can play in poverty alleviation is the development and maintenance of an environment that is conducive to private sector development. Overlapping regulatory constraints on property use and public competition with the private sector will slow the restructuring of over-industrialized economies which have been unresponsive to individual demands. Indeed, without a vibrant private economy serious inroads into poverty are unlikely. Finally, it needs to be recognized that the evolution of the legal basis for a well-functioning private sector and progress toward decentralized fully accountable local governments will take time. In only a limited number of cities in the region are local officials truly accountable to citizens. Fewer still can access finance on a prudent and sustainable basis, e.g., some of the cities in the Czech Republic, Hungary, Poland and Estonia. For others, an intermediate step, somewhere between municipal finance and social funds, is needed. These cities can reasonably be expected to improve on cost-recovery, both of which are essential steps in creating productive, well-run cities. It will take time, however, to develop better systems of local governance.
B. INSTITUTIONS AND THE PRICING OF URBAN SERVICES
Local authorities in all transition economies are clearly challenged by the necessity to adjust to market conditions and the process of decentralization while coping with rising unemployment and economic distress. The structure of government in the old regime effectively outlawed the kind of local decision-making that is used to provide about 40 percent of total public expenditures in the OECD
The Way Forward for Transition Cities
economies (Hughes and Smith 1991). In most cases, neither households, nor sub-national authorities could bid for funds from the publicly owned and controlled financial system and subnational authorities could not formally bid for resources. Consequently, as noted earlier, what might be described as the “quasi-market” for local public investments also did not exist and is only now developing. But, the lack of this market does not mean that the investments were not made. Indeed, the evidence is the contrary: Unlike the situation in other economies with which the Bank deals, cities in transition countries generally have a substantial urban capital stock. Unfortunately, it is usually under-priced and of rapidly deteriorating quality. Local officials know that in order to exploit the opportunities presented by this capital they must charge higher prices. However, they also know that higher charges cannot be easily afforded by many of their citizens, and as newly elected leaders, they are reluctant to make unpopular decisions. They also are very concerned about the creation of new employment opportunities, but they lack, in most cases, the tools and the experience to develop a longer-term strategic framework for city development. Finally, although they are often keen to get more private sector involvement in the responsibilities of service delivery, many have found it difficult to negotiate with potential investors or service providers. Ultimately, and perhaps most important, local officials realize that they must involve the private sector to a much greater extent because they face extremely tight budgetary constraints. Urban transport and water supply systems will also, for the most part, continue to remain a budgetary responsibility of urban governments. The budgetary exigencies, as well as the rising backlog of unmet needs in the transport sector itself, make it urgent to raise revenues and save on expenditures. To do this, simultaneous actions have to be taken along many fronts besides prices. In the case of transport, in addition to the direct budgetary incentives to reform, there is an even more important reason for a new approach—the high indirect costs of poorly priced transport systems. There is increasing recognition in the western market economies that both efficiency and equity require that road users be charged for the costs they impose upon others, notably through pollution and traffic accidents. Costs presently unpaid are large, and, especially in the case of pollution, occur mostly in urban areas. Willoughby (2000), for
instance, shows that estimates of these costs across a variety of different economies are on the order of 5 percent of GDP of cities. Appropriate combinations of taxes, charges and fines have to be designed for particular local conditions in order to convey to drivers as effectively as possible the marginal social costs of their use of the roads. In transition cities—with their concentration of population at the peripheries of cities, higher use of cars per kilometer of road, as well as the rapidly growing rate of car ownership—these costs could be even higher. Added to this is the fact that the rate of road fatalities are more than four times the rates in the EU or the US, and that the use of lead-free gasoline is considerably lower.
C. PRIVATE SECTOR DEVELOPMENT
Our more comprehensive companion study presents evidence that cities in transition countries are well endowed with respect to the supply of such public assets as housing and urban transport. The housing stock has, in most cases, been privatized. For example, the share of the housing stock that was privately owned in transition economies in 1999 exceeded that of Western Europe.8 But while the individual apartments are privately owned the common space is often ambiguously managed. Much can be done to improve the energy efficiency of this stock, as well as the maintenance and the targeting and transparency of the often high level of subsidies. Furthermore, much of the benefit from such improved targeting would redound to local governments. A key step needed to maintain this stock and improve the targeting of subsidies is the development of low-cost, highly transparent real estate markets. In order for labor markets to function effectively and the agglomeration economies of urbanization to be realized real estate markets must be able to send signals about the economic costs and rewards of various land use. Without such markets and their signals labor markets are constrained and it is difficult to determine where to make fixed capital investments. Finally, real estate markets are important because probably never before has there been such far-reaching and simultaneous change in the ownership of so much wealth for so many people. The housing and real estate privatization programs pursued represent substantial redistribution of wealth. For example, in many of the countries of the region, and particularly those where the enterprise sector has collapsed, this wealth often represents the only
The average share of private owner-occupied housing in Western Europe is 56 percent. In almost all of the transition economies it exceeds this rate and in many countries such as Lithuania, Albania and Slovenia it exceeds 85 percent. 27
From Commissars to Mayors: Cities in the Transition Economies
lasting benefit of the old regime that has survived inflation and transition. The value of the housing held by just the elderly in Moscow in 1995 was equal to half of the capitalized value of the stock market in that year.9 Managing and maintaining this important source of wealth will be increasingly important now that macroeconomic stability and the basis for sustainable growth have been established. To conclude, one must remember that the processes that determined the urbanization patterns that now characterize many transition economies, particularly those in the FSU, were basic components of the socialist economic system. Even if, in the long history of many of the region’s cities, 40 years of reliance on central planning is not a long time period, the regime change now in process is unique in history. Never before has there been such farreaching and simultaneous change in the mechanisms that are relied upon to allocate so many resources to so many people in so many places. Instead of a centrally managed Communist Party controlling public goods, local govern-
ments are beginning to take on and share these responsibilities with private owners and users. Moreover, these governments are increasingly becoming accountable to their citizens, rather than to unelected commissars and party officials. This process will take time, but it is, unquestionably, an essential step to ensure that government responds rather than dictates to individuals. It will take time for these societies to absorb and come to terms with such epochal changes. As Kornai (1992, p. 580) said, “There is no telling how rapidly or consistently the change and clarification of the system of values will take place. And beyond [that], there is no predicting how long the profound transformation of all other properties of society will take. [But,] the transition will certainly be easier if those involved in it [...] realize [...] where it started and what the nature of the old order was that has left such deep marks on the new.” In order to address the region’s profound poverty problems and the growing pains of new democracies, an understanding of the legacy of the patterns of urbanization is essential.
See Buckley, Cartwright, Struyk, and Szymanoski (2000).
Anderson, Philip, and Christopher Willoughby. 1999. “ECA Railways: Trends, Prospects and Challenges.” Working Paper 10. World Bank, Europe and Central Asia Region, Infrastructure Sector Unit (ECSIN). Washington, D.C. Andrusz, Greg. 1979. “Some Key Issues in Soviet Urban Development.” International Journal of Urban and Regional Research 3(2). Bertaud, Alain, and Bertrand M. Renaud. 1997. “Socialist Cities without Land Markets.” Journal of Urban Economics 41:137-151. Buckley, Robert, K. Cartwright, R. Struyk, and E. Szymanoski. 2000. “Housing Wealth and the Social Safety Net for the Elderly in Russia.” World Bank, Europe and Central Asia Region, Infrastructure Sector Unit (ECSIN),Washington, D.C. Processed. Chenery, Hollis, and Moshe Syrquin. 1986. “Typical Patterns of Transformation.” In Chenery, Hollis, Moshe Syrquin, Industrialization and Growth: A Comparative Study. New York: Oxford University Press. Clark, Colin. 1951. “Urban Population Densities.” Journal of the Royal Statistical Society 114:375-86. Clarke, Roger A., and Dubravko J.I. Matko. 1983. Soviet Economic Facts, 1917-81. University of Glascow, Institute of Soviet and East European Studies. Coricelli, Fabrizio, Hagemajer and Rybinsky. 1995. “Poland.” In Simon, Commander, and Fabrizio Coricelli, eds., Unemployment Restructuring and the Labor Market in Eastern Europe and Russia. World Bank EDI Development Studies, Washington, D.C. Dániel, Zsuzsa. 1999. “Housing Subsidies and Social Redistribution: The Case of Hungary” Working Paper no. 11. World Bank, Europe and Central Asia Region, Infrastructure Sector Unit (ECSIN), Washington, D.C. Deichmann, Uwe, and Vernon Henderson. 2000. “Urban and Regional Dynamics in Poland.” Policy Research Working Paper. World Bank Development Research Group, Washington, D.C. De Melo, Martha, et al. 1997. “Circumstance and Choice: The Role of Initial Conditions and Policies in Transition Economies.” Policy Research Working Paper 1866. World Bank, Development Research Group, Washington, D.C. European Bank for Reconstruction and Development. 1999. Transition Report 1999: Ten Years of Transition. London. Easterly, William, and Stanley Fischer. 1994. “The Soviet Economic Decline.” World Bank Economic Review 9: 341–372. Gurenko, Eugene, and Maria Shakaratan. 2000. “Maintaining the Delivery of Wastewater Services to the Poor in ECA Countries: Are There Better Ways?” Draft Working Paper. World Bank, Europe and Central Asia Region, Infrastructure Sector Unit (ECSIN), Washington, D.C. Hegedus, József, Stephen K. Mayo, and Ivan Tosics. 1997. “Transition of the Housing Sector in the East Central European Countries.” Review of Urban and Regional Development Studies 8:101-136. Heller, Michael A. (1998). “The Tragedy of the Anticommons: Property in the Transition form Marx to Markets.” Harvard Law Review 111:622–688. Henderson, Vernon J. 1988. Urban Development: Theory, Fact and Illusion. New York: Oxford University Press. Hofman, and Yuan. 1993. “The Economics of Fiscal Federalism: Issues and International Experience.” World Bank Background Paper for a Seminar in Moscow October 18-21. Table 19. Hughes, Gordon, and Stephen Smith. 1991. “Economic Aspects of Decentralized Government: Structure, Functions and Finance.” Economic Policy: A European Forum 6:-59. United Kingdom. Kornai, Janos. 1992. The Socialist System: The Political Economy of Communism. Princeton, N.J.: Princeton University Press. Long, Millard. 1999. “A Perspective on Finance and Development: World Development Report 1999.” Third Annual Seminar on New Development Finance at Goethe University of Frankfurt, September 1999. Maddison, Angus. 1995. Monitoring the World Economy: 1820-1992. Organisation for Economic Co-operation and Development (OECD) Development Center. Paris. Milanovic, Branko. 1998. “Explaining the Increase in Inequality During the Transition.” Policy Research Working Paper 1935. World Bank, Development Research Group, Washington, D.C. Mills, Edwin S. 1998. “Internal Functioning of Urban Areas.” Mimeo (Draft Paper for the Cities in Global History Project in collaboration with the World Bank), July. Mohan, Rakesh. 1993. Understanding the Developing Metropolis. World Bank. New York: Oxford University Press. Moorsteen, Richard H., and Raymond P. Powell. 1966. The Soviet Capital Stock, 1928-1962. Homewood, Illinois: R. D. Irwin. Noguchi, Yukio, and James M. Poterba. 1994. Housing Markets in the United States and Japan. Chicago: The University of Chicago Press.
From Commissars to Mayors: Cities in the Transition Economies
Prud’homme, Remy. 1995. “The Dangers of Decentralization.” World Bank Research Observer 10:201-20. Washington, D.C. Renaud, Bertrand. 1991. Housing Reform in Socialist Economies. World Bank Discussion Paper 125. Washington, D.C. Renaud, Bertrand. 1995. “The Real Estate Economy and the Design of Russian Housing Reforms.” Urban Studies 32(9):1437-51 and 32(8):1247-64. Rowland, Richard H. 1998. “Metropolitan Population Change in Russia and the Former Soviet Union, 1897-1997.” Post-Soviet Geography and Economics 39(5):271-296. Saint-Etienne, Christian. 1984. The Great Depression, 1929-1938: Lessons for the 1980s. Stanford, California: Hoover Institution Press, Stanford University. Shleifer, Andrei, and Vishny, Robert W. 1993. “Corruption.” Quarterly Journal of Economics 108(3): 599-617. University of Pennsylvania, Center for International Comparisons. n.d. Penn World Table Center for International Comparisons; http://cansim.epas.utoronto.ca:5680/pwt/pwt.html.
Wetzel, Deborah, and Jonathan Dunn. 1998. “Decentralization in the ECA Region: Progress and Prospects.” World Bank, Washington, D.C. Willoughby, Christopher. 2000. “Managing Motorization.” Working Paper. World Bank, Washington, D,C. Processed. World Bank. 1995. World Development Report 1995: Workers in an Integrating World. New York: Oxford University Press. World Bank. 1998. Strategic View of Urban and Local Government Issues. World Bank. 2000a. “From Commissars to Mayors: Cities in Transition Countries.” [Extended Version]. World Bank. 2000b. Making Transition Work for Everyone: Poverty and Inequality in Europe and Central Asia. Washington, D.C. World Bank. 2000c. World Development Report 1999/2000: Entering the 21st Century. New York: Oxford University Press. World Bank. 2000d. World Bank Development Indicators Database.
ANNEX A. RECESSION IN TRANSITION ECONOMIES—HISTORICAL PERSPECTIVE
The ECA transition economies started reforms with a broad range of initial conditions. Per capita income varied by more than six times, from $9,200 in Slovenia to $1,400 in Albania, in 1989 dollars. Some countries are proximate to Western European markets with good transport connections; others are isolated from such markets. Many are highly urbanized, whereas some others are not, for example, Tajikistan at 34 percent. Finally, never before has an entire region of the Bank performed so poorly for such an extended period of time—not even sub-Saharan Africa during its decades of lowest performance. When fundamental regime changes are contemporaneous with such severe economic shocks, those depicted in Chart 2, the difficulty of transition is greatly intensified. The following charts show the growth records of two different groups of countries from 1990 to 1999. These are two of the best ECA performers—Poland and Slovenia— and three of the worst-performing ECA economies— Moldova, Georgia, and Tajikistan.
Chart 1 shows that in Poland and Slovenia the contraction in income during the transition was roughly comparable to that experienced in the US during the oil-price shock period of 1973-82. Chart 2 compares the last ten years of some of the worst-performing countries in ECA to the growth rate of the US in the ten years following the Great Depression (1929-38) and to the FSU in the years after the 1917 revolution (1917-26). The comparison shows that the recent transition led to a contraction of economic activity much greater than either of the other two historical events. Moreover, ten years after the onset of the Great Depression or the October Revolution, the US and the FSU, respectively, had fully recovered, but Moldova, Georgia and Tajikistan had not yet shown signs of sustained growth in the 1990s. Thus, for some countries, the transition has been more traumatic than either of the other two periods of economic distress. In contrast, for other countries, the transition has not been much worse than a severe OECD country economic business cycle.
160 Poland 90–99 USA 73–82 120 Slovenia 90–99 GDP 100 USA 29–38 80 Poland 90–99 60 Slovenia 90–99 USA 29–38 USA 73–82 1 2 3 4 5 6 Ten-year period 7 8 9 10
From Commissars to Mayors: Cities in the Transition Economies
160 140 120 100 GDP 80 60 40 20 0 1 2 3 4 5 6 Ten-year period 7 8 9 10 Tajikistan 90–99 Moldova 90–99 Georgia 90–99 Moldova 90–99 Georgia 90–99 Tajikistan 90–99 US 29–38 Russia 17–26 US 29–38 Russia 17–26
Sources for Charts 1 and 2: Christian Saint-Etienne (1984); Roger A. Clarke and Dubravko J. I. Matko (1983); World Bank ECA Database (2000d).
ANNEX B. URBANIZATION AND INDUSTRIALIZATION
The 2x2 matrix below classifies 25 of the 27 ECA transition economy countries (data was not available for Bosnia Herzegovina and Yugoslavia) by degree of urbanization and over-industrialization in 1990. We classify a country as highly urbanized when the portion of people living in cities is at least 45 percent. The choice of this threshold is determined as follows: The World Bank Strategic View of Urban and Local Government Issues (July 1998) reports that urban population growth typically occurs at an increasing rate with levels of urbanization below 40 percent, and at a decreasing rate with levels above 40 percent. Therefore, we use 45 percent as a conservative threshold to classify countries that
have achieved a mature stage in the urbanization process. As for over-industrialization, we use the results in de Melo et al. (1997), that computes the difference between the actual share of industry in GDP and the predicted one (based on a vector of country characteristics). We classify as highly over-industrialized those countries for which the difference above is positive. The results show that a large portion of the sample—in terms of the number of countries, share of GDP and share of population (these figures are reported in parentheses in each cell, starting with GDP share) are highly urbanized and over-industrialized, which is the typical legacy of the planned economy era for transition economies.
Armenia, Azerbaijan, Bulgaria, Belarus, Czech Republic, Estonia,
Georgia, Lithuania, Latvia, Macedonia FYR, Poland, Romania, Russian Federation, Slovak Republic, Slovenia (89%, 84%) Croatia, Hungary, Kazakhstan,
Moldova, Turkmenistan, Ukraine (7%, 8%)
Albania, Tajikistan, Uzbekistan
From Commissars to Mayors: Cities in the Transition Economies
ANNEX C. URBANIZATION AND GROWTH ESTIMATES
The Urbanization—GDP per capita combinations in 1960 and 1990—for middle- and higher-income countries were derived as weighted averages of individual values as reported by the World Bank World Development Report (using country population figures as weights). As for the Urbanization-GDP per capita combinations in 1960 and 1990 for countries in Eastern and Central Europe (ECA), these were weighted averages of individual observations for the former Soviet Union, former Yugoslavia, Hungary, Romania and Poland (for which data on urbanization, GDP per capita, and population were available for both 1960 and 1990). In particular, urbanization figures for the former Soviet Union came from, “The First Book of Demographics for the Republics of the FSU, 1951-1990,” New World Demographics, L.C., 1992. Those for the other countries were taken from World Urbanization Prospects, The 1996 Revision, United Nations. Former Soviet Union
GDP per capita was computed based on Easterly and Fischer (1994). Data for other countries came from the Penn World Tables. Using those two points, we derived an approximation of the relationship between urbanization and income in market and socialist economies, respectively. At the beginning of the transition—that is, in 1990—average urbanization and per capita income (Purchasing Power Parity 1990 US$) in ECA were 64 percent and $5,300, respectively (point A). The level of urbanization corresponding to a $5,300 per capita income is 52 percent on the “market economies” line (see B on the graph)—12 percentage points lower than that in ECA. The per capita income on the “market economies” line corresponding to a 64 percent urbanization level is $8,700 (see point C on the graph). Thus, the level of per capita income achieved in ECA countries at that same level of urbanization, is only 60 percent of that achieved in the “market economies.”
ANNEX D. HOUSEHOLD EXPENDITURE PATTERNS
The data in Table 1 come from a variety of sources and cover a range of countries. Although the data are not comparable across countries, efforts were made to use consistent sources. For example, the housing and utility cost data for transition economies from the beginning of the reform period come from Renaud (1991). The housing and utility data for transition economies more recently are from World Bank (2000c). The housing, utilities and transport data for OECD countries are for 1997 and 1998 and come from: France, Ministère de l’Économie, des Finances et de l’Industrie. 1998. Annuaire Statistique de la France. Vol. 101, Tableau D.01-1A; Ministère de l’Économie, des Finances et du Budget. 1988. Annuaire Statistique de la France. Vol. 93, Tableau D.01-1A. Germany, Statistisches Bundesamt. 1998 and 1985. Statistisches Jahrbuch. Bonn. Italy, Sistema Statistico Nazionale Instituto Nazionale di Statistica. 1997. Annuario Statistico Italiano. Tavola 11.14; Instituto Centrale de Statistica. 1986. Annuario Statistico Italiano Edizione. Tavola 20.2. United Kingdom, Central Statistical Office. Annual Abstract of Statistics. 1999. No. 135, Table 8.5; 1995, No. 131, Table 15.5. United States, Bureau of Labor Statistics. Consumer Expenditure Surveys. Internet link: ftp.bls.gov/pub/special.requests/ce/standard/y8497.txt. The data on transport for the transition countries are from: Bulgaria, Tsentralno Statistichesko Upravlenie Pri Ministerskiya C’vet. 1986. Statisticheski Godishnik na Narodna Republika B’lgariya. 1986. Table 25, Sofia. Czechoslovakia, Czech Statistical Office. Statistical Yearbook of the Czech Republic 1998, Table 9-8; Federàlni Statisticky Ùrad Cesky Statisticky Ùrad,
Slovensky Statisticky Ùrad. Statistickà Rocenka Ceskoslovenskè Socialistickè Republiky 1987, Table 20-9, Prague. Hungary, Hungarian Central Statistical Office. 1983. Statistical Yearbook. Table 19.8: Statistical Yearbook. 1997. Table 5.5. Macedonia, Statistical Office of the Republic of Macedonia. 1997. Statistical Yearbook of the Republic of Macedonia. 32:586-587, Skopje. Poland, Glòwny Urzad Statystyczny. 1998. Maly Rocznik Statystyczny. 1986. Tabl. 15 (113). Russia, Goskomstat Rossii. 1999. Rossii v tsifrakh. Kratkii Statisticheskii Sbornik. Table 8.13; Goskomstat Rossii. 1992. Narodnoe Khoziastvo Rossiiskoi Federatskii. Statisticheskii Ezhegodnik: 146-147. The data on local government spending are from Local Finance in The Fifteen Countries of the European Union—Dexia, Brussels (1997). The average figure was 13.0 percent of GDP for these countries with a range of 2. 1 to 33 percent and a median of 11. 7 percent. If we assume that household expenditures account for about 75 percent of GDP, an assumption that will make our estimates conservative, then the 13.0 percent share of GDP accounts for slightly more than 17 percent of household expenditures. Figures on local government share of household expenditures at the beginning of the reforms are from Table 19 of Hofman and Yuan (1993), “The Economics of Fiscal Federalism: Issues and International Experience,” World Bank Background Paper for a Seminar in Moscow, Oct. 18-21, 1993. These observations are only for Hungary, Romania, the former Yugoslavia, Poland and Russia. The average was 6.0 percent of GDP with a range of 0 to 17.5 percent and a median of 4.3 percent. The later data on transition economies are inferred from various World Bank analyses on the share of local government expenditures autonomously raised as a share of household expenditure. See, for example, Wetzel and Dunn (1998).
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