These cases demonstrate that the shock therapy type of privatization reform is not effective in increasing production. The shock approach has significant benefits in improving the basic conditions in which enterprises operate, but not in bringing about enterprise reform itself. As Dr. John Flemming, Chief Economist of EBRD, has pointed out, enterprise reform takes a longer time, and therefore a gradual approach is required.

Though the gradual approach to enterprise reform may thus generally be preferable, the government must in any event instill financial discipline and restrain the demands of state enterprises for support-so-called 'hard budget constraints' have to be established. But the most essential environmental prerequisite for reform of state-owned enterprises is the establishment of the market function in terms of both output prices and input prices. Competition with private enterprises or foreign companies is the best way to reform state enterprises.

## 3 -5-3 Promotion of Private Enterprise

Efforts to create and expand the role of private, nonagricultural enterprises in transitional economies, have centered not so much on the widespread privatization of state-owned enterprises, but more on opening up areas of economic activity for non-state-owned enterprises, through liberalizing measures. Private enterprise has responded mainly through small-scale activity, particularly in trading, services, crafts, and light industry, while foreign direct investment has been attracted to larger scale ventures, typically joint-ventures with state-owned enterprises. However, given the early success of private business, for example, in China and Vietnam, large scale private enterprises can be expected to emerge rapidly. Also, something close to private business may emerge from the spontaneous evolution of state-owned enterprises.

In Vietnam, while the government has been actively attempting to improve the investment environment, the lack of an effective legal framework remains a source of risk and uncertainty. Various decrees, including the Law on Equity Companies, have sought to reduce this uncertainty. Nevertheless, the lack of willingness of local government to implement central government legislation, and the ambiguity facing many investors regarding the division of administrative responsibility between central and provincial authorities, have been an important constraint on the growth of the private sector. Thus the establishment of price mechanisms may not be sufficient in itself for the nurturing of the private sector. Supporting legal and administrative frameworks should also be established as quickly as possible.

## 3 -5-4 Financial Reform as an Urgent Job for Sustainable Growth without High Inflation

Like in Vietnam, transitional countries which are lacking in absolute capital may have limits for their macroeconomic development. Expansion of spending for basic infrastructure will be financed by issuing additional government bonds, which become causes for new inflation through two reasons; one is total demand is pushed up by money supply increase, the other is total supply will be reduced by high interest rate, so-called crowding-out effect. To prevent it, monetary policy should be more effective based on establishment of financial