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# **Socialist Eoonomles Reform**

WPS 948 This paper is a product of the former Financial Advisory Services group in the Cofinancing and Financial Advisory Services Department. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Robert Lynn, room H9-113, extension 32169 (July 1992,26 pages).

Despite a common heritage of institutions and arrangements for economic planning and trade clearing, and their almost simultaneous adoption of reform, the countries participating in Eastern Europe's economic transformation differ greatly in economic performance and market expectations of performance.

> * The importance of the former Soviet umbrella.

> * Indicators of relative indebtedness.

> * The flow of funds to the region, by source, from 1989 on.

Mukherjee examimies those differences as the region's economic transformation nears its third anniversary, focusing on the underlying factors that drive private capital flows - from both commercial lenders and foreign investors.

- Improved creditworthiness or the ability to attract voluntary private-sector finance for successively longer periods, with fewer guaran- tees required is a major signal that the economic reforms are beginning to take hold.

Mukherjee examines the different stages on the road to creditworthiness at which she finds the Eastern European countries. Hungary and Czechoslovakia (CSFR) are the only countries that can issue medium- to long-term sovereign bonds held by private investors (the ultimate test of creditworthiness, by some standards). In Hungary, maturities on the most recently issued deutschemark bonds now extend as long as seven years; private placements of yen are even more favorable - extending to ten years.

Mukherjee identifies and compares crosscountry infonnation about some of the factors that influence differing market perceptions of Bulgaria, Czechoslovakia, Hungary, Poland, and Romania. Among factors discussed:

> * The maturity of commercial debt and especially the magnitude of short-term debt.

* The identity of "other private creditors," and factors that affect the amount of project finance and foreign direct investment available.

> * The setup of emerging financial institutions.

* Long-term commercial flows - especially bond finance (access to the Eurobond market for medium- and long-term funds).

The region is not well known to lenders that might be able to meet its many emerging needs for financing. And the few statistics available may be doubtful or misleading in the context of a market economy. Mukherjee bases her observations largely on interviews with people in commercial banks and investors active in Central and Eastern Europe. All data have been provided by those sources and by country reports issued by the Institute of Internationai Finance. The latter is a major source of figures used by private lenders when they assess a borrower's prospects.

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