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Ms. Ratna Sahay, Mr. Carlos A. Végh Gramont, and Mr. Stanley Fischer

Europe Combined Indicators, 1995. An overall impression given by Chart 5 is that economic distance from Brussels increases—on average—with geographical distance from Brussels. Another is that the CEE transition countries have done exceptionally well in keeping their budget deficits down. We now create a rank order index which combines the performance in six categories ( Table 6 ). The best-performing country in each category is ranked first in that category. For example, in Table 6 Croatia is ranked first in the category “annual inflation” since it had the

Ms. Ratna Sahay, Mr. Carlos A. Végh Gramont, and Mr. Stanley Fischer
The current destination of Central and Eastern European countries—explicitly for some, implicitly for all—is Brussels. The concept of the distance from Brussels is multi-dimensional. One simple measure, not without theoretical and empirical justification, is physical distance. This paper’s focus, however, lies more in the distances in time and economic space. The paper first compares income gaps between Central and Eastern European and European Union (EU) countries, then evaluates recent economic performance in Central and Eastern Europe in light of EU standards. Finally; addresses the question of how long it will take the Central and Eastern European countries to close the income gap with EU countries.
International Monetary Fund

continues to be focused on low inflation, while keeping an eye on exchange rate developments. Last year’s inflation was 2.3 percent, with core inflation about 1 percent. It is noteworthy that this year - 2003 - is the 10 th anniversary of the stabilization program (implemented in Fall 1993), during which Croatia has been experiencing very low inflation rates. On average, annual headline inflation has been roughly 3.3 percent, and core inflation has remained below 2.5 percent. With such a performance, Croatia is an excellent performer among CEE transition countries, and

International Monetary Fund

cannot keep pace, house prices are likely to surge. For example, data from the CEE transition countries show larger mortgage markets to be associated with higher construction activity. Yet, in Latvia, high mortgage lending has coincided with only moderate new construction, and instead seems to have mainly driven up house prices. They more than tripled in only five years, which is high even among the new EU member states. Supply side constraints seem to have played an important role in this, including slow zoning and building authorization, land shortages in main

International Monetary Fund

the theory behind capital flows. Section III presents the stylized facts of recent capital flows to Poland. Section IV reviews the experience of other large scale privatizers. Section V looks at the empirical determinants of capital flows. Section VI concludes. B. Analytical Considerations 3. Poland and the other Central and Eastern European (CEE) transition countries have benefited from large capital inflows in recent years . The theoretical work on capital flows suggest the following key motivations: Capital stock adjustment : Predictions from the law

Mr. Leslie Lipschitz

private property, effective governance that limits corruption and discourages other aspects of rent-seeking behavior) there will be similar rules governing the financial sectors, trade, competition policy, and the like. Thus the A terms in the production functions—which incorporate the most important elements in the convergence process—should move relatively quickly to something like Western European levels. It is, therefore, interesting and not entirely idle to speculate on differences in the marginal products of capital between Western Europe and the CEE transition

Mr. Jerald A Schiff, Mr. Axel Schimmelpfennig, Mr. Niko A Hobdari, and Mr. Roman Zytek

Union and other central and eastern European (CEE) transition countries relied almost exclusively on the state pensions for income during retirement. Under the Soviet Union’s economic system, individuals were not expected, or even allowed, to accumulate meaningful financial assets during working years (see Table 2.1 ). While households could save for purchases of major “big-ticket” items, such as appliances, cars, or, to a limited degree, housing, saving to derive capital income was not permitted. Table 2.1. The Baltic States: Household Wealth Held in Bank

International Monetary Fund

2 and 3 banks, would require considerable recapitalization. The total capital shortfall under this worst case scenario would, however, be limited to less than 1 percent of 2002 GDP. E. Comparison with Bank Intermediation and Performance in Central and Eastern European Countries 27. Bank intermediation in Bulgaria is relatively low by the standards of other central and eastern European (CEE) transition countries ( Table 8 ). With the exception of Romania, monetization, as measured by the M2-to-GDP ratio, is below that in other CEE countries. Domestic

Mr. Tapio Saavalainen and Joy Mylène ten Berge
Quasi-fiscal deficits of public utility companies are common in all member countries of the Commonwealth of Independent States (CIS). They constitute a significant impediment to efficient resource allocation and endanger macroeconomic stability. This paper presents a simple framework for measuring and monitoring such deficits and highlights their macroeconomic relevance. It reviews the progress under IMF conditionality aimed at correcting these imbalances during 1993-2003. The paper suggests that the extensive conditionality under the IMF-supported programs has yielded only limited progress in reducing the energy sector's financial imbalances. In conclusion, different policy options are discussed in light of the lessons learned.
Mr. Tapio Saavalainen and Joy Mylène ten Berge

.9 -0.1 0.9 0.1 Tajikistan 1.3 0.2 1.0 0.1 Ukraine 3.1 2.1 0.6 0.4 Uzbekistan 10.7 7.0 2.8 0.9 Source: Authors’ estimates. 1/ Based on Table 5 . III. M acroeconomic R elevance of Q uasi -F iscal D eficits Quasi-fiscal deficits have several negative macroeconomic and structural implications. In particular, high QFDs in the energy sectors of CIS and Central and East European (CEE) transition countries appear to be closely linked with high energy inefficiencies as measured by the use of