Transition Economies Need to Reform Social Safety Nets

 

The former centrally planned countries undergoing economic transition have experienced a sharp decline in output, income and employment in recent years. This has resulted in severe hardships for many households, particularly the elderly, young children, and the unemployed.

In this adverse climate, tansition countries now face the challenge of securing adequate resources for social protection. But the ability of governments to help identify the poor or administer targeted social protection programmes is undermined by severe financial and administrative constraints.

Unemployment and Underemployment. The collapse of output has drastically reduced labor demand, increasing open unemployment in some countries and underemployment in others. While registered unemployment throughout the region is low, total employment has declined. In Russia, for example, total official employment dropped to about 6.7 million by 1995, from 7.4 million in 1991.

The absence of normal labor market adjustment mechanisms in transitional economies further complicates the employment situation. For example, despite diminishing work opportunities in the formal sector, large numbers of employees choose to stick with their traditional employers in order to hold onto company-provided housing, education, and health benefits; an additional incentive to stay put is the inadequacy of unemployment compensation.

Financial Constraints. Prior to the onset of the reforms the governments of centrally planned economies controlled virtually all prices and wages; guaranteed employment for all, at least in principle; and provided universal public pensions, child allowances, and other benefits for sickness, maternity, and childbirth. But since the early 1990s, outlays for social protection in transition countries have come under increased financial pressure since revenue from payroll taxes – traditional source of funding for such programmes – began to fall.

Besides-, the low statutory retirement ages for men and women have further reduced the number of working-age individuals.

On top of that the authorities have so far been unable to improve the distorted benefits structure. They still provide generous services with loose eligibility requirements, running from housing benefits to subsidized vacations. Paradoxically, welfare benefits are distributed among all instead of being given to the most needy.

Since the above trends have affected both the revenue base of social protection programs and the ability of these countries to target social benefits, international experts believe that to find a solution of the social protection problem the transition economies will have to:

• reform eligibility and benefits standards governing the distribution of social benefits;

• raise statutory retirement ages;

• require individuals to vacate their last job on reaching retirement age;

• establish a more equitable distribution of social adjustment burdens across different population groups;

• broaden the tax base to include presently untaxed elements of labour compensation; increase the efficiency of expenditures in government programmes, including outlays for social protection, and prioritize them.

• work out effective targeting mechanisms for the provision of benefits.

 

Words you may need:

targeted program целевая программа

to stay put оставаться на месте; (зд.) не менять место работы

onset n начало

child allowance пособие на ребенка

maternity n материнство

payroll taxes налог на заработную плату

statutory adj установленный законом

eligibility и применимость (льгот), попадание (под льготы)

retirement age пенсионный возраст, возраст выхода на пенсию

vacate v освобождать

Ex. 19. Look through the article and find the answer to the following question: What can help improve the lives of people in transition economies?

Decentralizing Fiscal Systems in Transition Economies

 

Since 1989, extensive political and fiscal decentralization has been under way in almost all countries in Central and Eastern Europe, Russia, and the other countries of the former Soviet Union. The trend toward fiscal decentralization and the transfer of some revenue-raising and expenditure authority from central to lower-level and subnational governments is, in part, a political reaction from below against the long years of extensive central control. Its economic motivation relates, on the one hand, to efforts by the center to ease its own strained finances by reducing transfers and shifting spending responsibilites and, on the other hand, to a widespread recognition that public funds need to be used more efficiently.

Since the transition, "local self-government" legislation has been enacted in virtually every former centrally planned economy in the region, giving subnational governments major responsibilities for expenditures in key areas.

However, the new legislation in these countries has generally not assigned clear responsibility to different levels of government for particular expenditures. Efforts to ease fiscal strains at the center seem to have shifted important spending responsibilities to subnational governments without sufficiently expanding their revenue sources. Recent legislation in Hungary and Poland, for example, has given local governments expenditure responsibilities in education, transportation, the environment, and housing without including specific plans for how they will be financed.

This shift in expenditure responsibilities, however, has created serious budget pressures for subnational governments, risking the crowding out of important expenditures, including those for health care and education.

The transition economies are in the midst of decentralizing their fiscal systems. But it is obvious even at this stage that the fiscal reforms should include increasing subnational governments' own revenue sources, assigning them the necessary tax instruments, and designing transfers and sharing arrangements that can provide them adequate revenues to meet their spending needs. Each level of government must know what its fiscal responsibilities are. Well designed decentralization policies will help improve the lives of those undergoing one of the major upheavals of our time – the move from a command to a market economy.

Words you may need:

decentralize v децентрализировать

to be under way быть в процессе осуществления

from below снизу

ease v облегчать

strained adj напряженный

self-government n самоуправление

assign v передавать

upheaval n переворот

UNIT 4.CENTRAL BANKING. MONETARY POLICY

A. TEXT

CENTRAL BANKING SYSTEM

 

The central banking system is a major sector of any modern monetary system. It is of great importance to the fiscal policy of the national government and the functioning of the private sector.

Central banks such as the Bank of England, the Federal Reserve Board of the US, the Bundesbank of Germany, the Central Bank of Russia function for the government and other banks, not for private customers. They are responsible for the implementation of monetary policy and supervision over the banking system.

In particular, they control the money supply, fix the minimum interest rate, act as lenders of last resort to commercial banks with liquidity problems, issue coins and bank notes, influence exchange rates by intervening in foreign exchange markets.

To ensure the safety of the banking system, central banks impose reserve requirements, obliging commercial banks to deposit a certain amount of money with the central bank at zero interest. Central banks in different countries also impose different "prudential ratios" on commercial banks such as capital ratio and liquid ratio.

In the course of market reforms in Russia the Central Bank has been pursuing moderately tight monetary policy aimed at further reduction of inflation and putting an end to direct budget deficit crediting.¹ The CBR has been using the following main instruments of monetary policy:

• fixed targets for the money supply growth,

• refinancing of commercial banks,

• interest rates,

• open market operations,

• commercial banks reserve requirements,

• foreign currency control,

• direct quantity restrictions.

 

* * *

 

The Federal Reserve System or "Fed", as it is known in financial circles, is an independent agency of Congress founded in 1913. The system consists of twelve federal reserve banks and a board of governors. The board of governors has its headquarters in Washington, D.C.

Members of the Fed's board of governors are appointed by the president of the United States and confirmed by the Senate. However, the Fed maintains a degree of independence from both Congress and the executive branch. This is due in part to the governors' long terms of office – fourteen years. The chairman of the board of governors is chosen by the president from among the seven board members and serves as chairman for four years.

The Fed performs three major functions. It provides services to the banking system and the federal government; it stabilizes the banking system; and it controls the quantity of money in circulation.

The most important service of the Fed is check clearing, i.e. making sure that checks written on one bank can be accepted at any other bank in the country.

The Fed performs a number of other services for banks and thrift institutions. It provides currency to banks and collects worn currency. It also provides safekeeping for securities.

Finally, the Fed performs banking services for the federal and foreign governments. It maintains US Treasury accounts from which all federal government payments are made. In addition, it assists in international transfers of funds by private firms and international agencies.

A second function of the Federal Reserve is stabilizing the banking system.

Banking panics often took place in the nineteenth century. Preventing such panics was the main reason for setting up the Federal Reserve System. With this in mind, the Fed was given broad powers to regulate banks.

The Fed's regulations are aimed at making sure that banks use sound business practices. For example, the Fed requires banks to hold a minimum fraction of their deposits as reserves.

The Fed was also given the power to supply extra reserves when needed. There are two ways in which the Fed can put reserves into the banking system. First, it can lend reserves to banks. Second, it can supply reserves to the banking system by buying government bonds from the public on the open market, in other words, by participating in open-market operations.

Despite its powers, the Fed failed to stabilize the banking system after the stock market crash of 1929. In the first years of the Great Depression, a great many banks failed.² As a result, a new agency, the Federal Deposit Insurance Corporation (FDIC), was set up in 1934 to give the system further stability. The FDIC promises to pay depositors the full amount of their deposits, up to a limit, in the event that their bank fails.

Today the Fed continues to regulate and stabilize the banking system, but it has taken on another role as well, that of partner, with Congress and the executive branch, in the making of economic policy. The Fed's power as an economic policymaker comes from its ability to control bank reserves and, hence, to control the total amount of money in circulation.

B. DIALOGUE

BANKING SYSTEM IN RUSSIA

Foreigner: What is characteristic of the Russian banking system these days?

Russian: The banking system in Russia is organized as a 2-tier system. The first tier is represented by the Central Bank of Russia. The second tier consists of commercial banks as well as branches and representations of foreign banks.

F.: Has the CBR supported the economic and financial transformation of the country, the ongoing reforms?

R.: Definitely. By implementing monetary policy the CBR has contributed to controlling the money supply and combating inflation.

F.: The interest rate policy has become more dynamic, hasn't it?

R.: Yes, the CBR has introduced lombard and REPO operations, created a new system of refinancing commercial banks and reduced the share of special-purpose credits.

F.: So, now your commercial banks get credits through auctions and other market mechanisms. Is the CBR involved in open-market operations?

R.: Yes, our Central Bank acts in the primary market, attracting financial resources to cover the state budget deficit by non-inflationary means.

F.: Since 1993 the financial sector has been developing fast. Have the changes in your banking system affected the position of the Central Bank?

R.: The CBR is strengthening its role in regulating banking activities. As elsewhere, the CBR of Russia guarantees the stability of the national currency and the banking system. It supervises the activities of commercial banks, issues and withdraws licenses for performing banking operations, etc.

F.: Now that you've mentioned stability of the banking system, I think it's the most important function of the CBR, particularly in the light of recent bankruptcies.

R.: You are right. To achieve this, some measures are being worked out to make banks increase³ the minimum size of authorized capital to correspond to the international standards.

F.: I'm sure these measures include provisions about reserves for possible losses on loans and securities.

R.: They do. The banking system is developing.

F.: What about the legal base? Is it adequate?

R.: More or less. The Law on Banking adopted in 1996 specifies rules for banking activities, for example, types of operations, operations with hard currency, etc.

F.: So, foreign banks can be set up and can operate in Russia, can't they?

R.: They can have branches and representation offices.

F.: Your banking system has made tremendous progress. How will it be developing in the future?

R.: Our experts have prepared drafts of laws which must give a further boost to the development of the banking system. I mean laws on hypothecation, on obligatory insurance of bank deposits and bank bankruptcy.

F.: Your Central bank is exempt from taxes. And what tax treatment is applied to your commercial banks? What taxes are paid by commercial banks?

R.: Tax on profit, tax on property, tax on income from securities and charges to the Pension Fund, to list the main.⁴

 

Notes

¹ direct budget deficit crediting – прямое кредитование бюджетного дефицита

² a great many banks... – многие банки

Обратите внимание на употребление неопределенного артикля в данной конструкции.

³ to make banks increase... – чтобы заставить банки увеличивать... (конструкция «винительный» + инфинитив)

⁴ to list the main – (зд.) которые являются основными налогами

VOCABULARY LIST

A. central banking system система центрального банка

monetary system денежная система

to be of importance быть важным

money supply денежная масса, количество денег в обращении

lender n кредитор, ссудодатель

lender of last resort последний кредитор в критической ситуации, центральный банк

liquidity n ликвидность

issue (coins and bank notes) v (зд.) осуществлять эмиссию (денег)

exchange rate обменный курс

intervene v вмешиваться

foreign exchange market рынок иностранной валюты

safety n надежность, безопасность

reserve requirements резервные требования

oblige v обязывать, принуждать, заставлять

deposit v депонировать

"prudential ratios." «коэффициенты благоразумия»

deposit n вклад

capital ratio отношение капитала к активам

liquid ratio отношение ликвидных активов банков к суммарным депозитам

target n цель, контрольная цифра

refinancing n рефинансирование

open market operations операции на открытом рынке

restriction n ограничение(я)

the Federal Reserve System n Федеральная резервная система

financial circles финансовые круги

federal reserve bank федеральный резервный банк

board of governors совет управляющих

headquarters n штаб-квартира

executive branch исполнительная ветвь власти

term of office срок полномочий

to perform a function выполнять функцию

stabilize v стабилизировать

quantity n количество

money in circulation деньги в обращении

to make sure обеспечивать, гарантировать

accept v акцептовать

check clearing клиринг чеков, чековый клиринг

collect v инкассировать

worn currency (зд.) старые банкноты

safekeeping n безопасное хранение

security n ценная бумага

to maintain accounts вести счета

transfer of funds перевод средств

international agency международное агентство

banking panic банковская паника

prevent v предотвращать

broad powers широкие полномочия

regulation(s) n правило, инструкции

to be aimed at doing smth быть направленным на...

sound business practice честная практика деловых отношений

fraction n часть, доля

lend v ссужать

government bond государственная облигации

despite prep несмотря на

stock market crash крах фондовой биржи

the Great Depression Великая депрессия

Federal Deposit Insurance Corporation (FDIC) Федеральная корпорация страхования депозитов

depositor n депонент, вкладчик, владелец банковского счета

limit n лимит, предел

in the event that... в случае, если...

В. 2-tier system двухуровневая система

to be represented (by) быть представленным (кем-л.)

lombard operations операции с ломбардными кредитами

REPO operations операции РЕПО

special-purpose credit целевой кредит

strengthen v укреплять

withdraw v (зд.) отзывать

in the light of в свете

bankruptcy n банкротство

authorized capital уставный капитал

reserve for possible losses on loans and securities резерв на покрытие возможных убытков по ссудам и ценным бумагам

legal base законодательная база

specify v оговаривать, устанавливать

tremendous adj громадный, потрясающий

hypothecation n ипотека

obligatory insurance обязательное страхование

to be exempt from taxes быть освобожденным от налогов

tax treatment налоговый режим

apply v применять

charges n pl (зд.) отчисления

EXERCISES

Ex. 1. Answer these questions:

 

 

A. 1. What is the major sector of any modern monetary system?

2. What are central banks responsible for?

3. What functions do central banks perform?

4. What is done to ensure the safety of a banking system?

5. Why are "prudential ratios" imposed on commercial banks?

6. What is the structure of the Federal Reserve System?

7. How are members of the board appointed?

8. What functions does the "Fed" perform?

9. What services does the "Fed" perform for banks and the government?

10. How does the "Fed" contribute to the stabilization of the banking system?

11. What role does the "Fed" play in the making of economic policy?

B. 1. How is the Russian banking system organized?

2. Has the role of the CBR changed over the years of the economic reforms?

3. What are the functions of the CBR?

4. What measures are being worked out to ensure stability of the Russian banking system?

5. How will the Russian banking business be developing?

6. What tax treatment is applied to banks in Russia?

Ex. 2. Give derivatives of:

 

important adj intervene v choose v tend v

national adj independent adj maintain v represent v

function n governor n finance n stability n

supervise v executive adj deposit n progress n

Ex. 3. Find English equivalents for the following Russian phrases from the text:

 

А. система центрального банка; быть важным (иметь значение); быть ответственным за проведение кредитно-денежной политики; контролировать денежную массу; устанавливать процентную ставку; проблемы нехватки ликвидных средств; осуществлять эмиссию денег; надежность банковской системы; депонировать средства в центральном банке под нулевые проценты; быть известным в финансовых кругах; совет управляющих; это результат длительного срока полномочий управляющих; члены совета назначаются; председатель совета выбирается; чеки, выписанные на банк; депонировать чеки в банке; осуществлять клиринг чеков через Федеральную Резервную Систему; вести счета; основная причина организации ФРС; покупать государственные облигации; операции на открытом рынке; многие банки обанкротились;

В. двухуровневая система; представительства иностранных банков; финансовые преобразования; система рефинансирования; заниматься операциями на открытом рынке; покрывать дефицит бюджета; неинфляционные меры; усиливать роль; отзывать лицензии; в свете недавних банкротств; соответствовать международным стандартам; резерв на покрытие возможных убытков; закон об ипотеке; обязательное страхование банковских вкладов; быть освобожденным от уплаты налогов; отчисления в Пенсионный фонд.

Ex. 4. Say in a few words what the main text is about. Use the opening phrases from Ex. 4 (Unit 1).

Ex. 5. Sum up the contents of the main dialogue. Use the phrases from Ex. 5 (Unit 1).