July 1998 To gain recognition from its counterparts in the European Union, Estonia must give priority to improving risk management in its banks and improving institutional capacity for bank regulation and supervision. The most important challenge of Estonia's strategy for integrating its financial sector with that of the European Union (EU) is to upgrade its capacity for prudential regulation and supervision enough to gain recognition from its EU counterparts. Doing so is also a crucial complement to Estonia's strategy for strengthening macroeconomic policy and stabilization-especially because, under a currency board, its banks are a central part of the transmission mechanism for capital flows. Under the currency board banks have been able to arbitrage between domestic and foreign financial markets-increasingly funding themselves from abroad. Such arbitrage has become the key funding source for rapidly expanding credit, contributing to the country's large current account deficit. Estonian authorities are justified in tightening prudential regulation and supervision because of the risks associated with an overheating economy, general market volatility, and the possible deterioration in the quality of credit. Improvements in prudential regulation should be followed by improvements in the country's capacity to supervise banks and an upgrading of the banks' risk management systems, to manage the increasingly complex operations and diverse markets in which they engage. These steps should be a priority. The institutional development of banks and supervision have lagged behind market developments. In improving the regulatory framework for banks, Estonia should avoid establishing incentives for tax arbitrage that lead to the creation of artificial and socially costly financial intermediaries. This paper is a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region. The authors may be contacted at ccavalcanti@worldbank.org or doks@worldbank.org.

"Economic integration that leads to the convergence of incomes and living standards is at the heart of the EU accession process. The assumption is that trade integration combined with institutional harmonization will lead to sustainable capital flows from European Union member countries to acceding countries ...'" Estonia's case for accession is built, to a large extent, on a record of sound economic management. Indeed, since regaining independence in 1991, Estonia has successfully implemented a broad agenda of stabilization and structural reform policies. This commitment to sound economic management has yielded positive results. However, at present, Estonia is experiencing a sharp economic slowdown as a result of two major external shocks, the Asia and Russia crises. This country study emphasizes areas where there is greatest overlap between the accession agenda and measures to strengthen economic management. These areas of overlap include upgrading financial sector supervision and strengthening budget management. It also includes reforms in areas where there is complementarity between reforms designed to facilitate accession and structural reforms that will support long-term growth and economic integration. These are the modernization of public administration, the adherence to EU quality standards, the continuous improvement of the operations of the customs board, and the completion of land reform. Finally, the last two chapters of the study examine areas where implementing the accession agenda entail either a fundamental change in Estonia's trade policy regime, or have high compliance costs. These are the adoption of the EUs Common Agricultural Policy (CAP), as it evolves, and complying with EU environmental standards.

This paper assesses the macroeconomic impact and policy challenges related to Estonia’s prospective accession to the EU and its potential adoption of the euro. Our analysis of the trade, financial, and fiscal channels includes a model-based illustrative scenario using MULTIMOD. We conclude that the welfare enhancing effects for Estonia of further EU integration are likely to outweigh the drawbacks of more pronounced macroeconomic imbalances that could accompany this process. To smooth Estonia’s accession-related adjustment, its fiscal and structural policies should be geared toward mitigating domestic demand pressures, promoting saving, and ensuring efficient public investment.

Countries create different type of incentives for foreign firms, such as; direct incentives/subsidies, tax relief, soft loans and preferred handling. This volume aims to analyze the impact of European Union on inward foreign direct investment in Europe and to discuss what type of effects are being created by this race for FDI.

With the profound political and economic changes of the 1970s and 1980s behind it, and regardless of its trade patterns, Chile's income distribution is, for the moment, calm. Education may be the most important variable affecting the structure of, and changes in, inequality in Chile. After rising in the 1960s, falling in the early 1970s, and rising again from the mid-1970s to the mid-1980s, income inequality seems to have stabilized in Chile since about 1987. With the stormy period of economic and political reform of the 1970s and 1980s well over, no statistically significant Lorenz dominance results could be detected after 1987. Scalar measures of inequality confirm this picture of stability but suggest a slight change in the shape of the density function-with some compression at the bottom compensated for by a stretching at the top. As inequality remained broadly stable, sustained economic growth led to substantial poverty reduction, according to a range of measures and with respect to three different poverty lines. Poverty mixed stochastic dominance tests confirm this result. All of these findings are robust to different choices of equivalence scales. An examination of the factors underlying these trends suggests that an equilibrium has (for the moment) been reached between rising demand for and supply of skills-the demand for skills associated with technological progress and the supply of skills associated with expansion of education. Chile's trading pattern might well be tangential to its recent distributional dynamics. This paper-a product of the Poverty Reduction Group, Poverty Reduction and Economic Management Network-is part of a larger effort in the network to understand income distribution dynamics in developing countries. The study was funded by the Bank's Research Support Budget under the research project Poverty and Income Distribution Dynamics in a High Growth Economy: The Case of Chile, 1987-94 (RPO 681-59). Francisco H.G. Ferreira may be contacted at fferreira@worldbank.org.

I provide the first comprehensive analysis of isolation programs for financially distressed firms in transition economies. The study is based on empirical evidence from the Romanian program. The results indicate that the isolation program did not deliver any tangible improvements in operational performance, nor did it enhance the process of privatization or liquidation of large loss-making enterprises. I also show that firms included in the program faced softer budget constraints than their comparators outside the program. These findings question the feasibility of creating special programs for enterprise restructuring and privatization under government auspices.

Examines the effect of the introduction of the Euro and the establishment of economic and monetary union on the financial landscape of Europe.

This collection offers a comparative overview of how financial regulations have evolved in various European countries since the introduction of the single European market in 1986. It includes a number of country studies which provides a narrative of the domestic financial regulatory structure at the beginning of the period, as well the means by which the EU Directives have been introduced into domestic legislation and the impact on the financial structure of the economy. In particular, studies highlight how the discretion allowed by the Directives has been used to meet the then existing domestic conditions and financial structure as well as how they have modified that structure. Countries covered are France, Germany, Italy, Spain, Estonia, Hungary and Slovenia. The book also contains an overview of regulatory changes in the UK and Nordic countries, and in post-crisis USA. This comparative approach raises questions about whether past and more recent regulatory changes have in fact contributed to increase financial stability in the EU. The comparative analysis provided in this book raises questions on whether the past and more recent changes are contributing to increase the financial stability and efficiency of individual banks and national financial systems. The crisis has demonstrated the drawbacks of formulating the regulatory framework on standards borrowed from the best industry practices from the large developed countries, originally designed exclusively for large global banks, but now applied to all financial institutions.

Written for undergraduate and graduate students, this textbook provides a fresh analysis of the European financial system.