Lyubimtseva_S_N__Koreneva_V_N_L_93_Kurs_angli

has yet to be finalized.

R.: Thus, an effective system of public expenditure and its monitoring has still to be established.

F.: I fully agree with you. Besides, the state enterprise sector presents an increasing challenge. Enterprises have accumulated payment arrears to other enterprises and banks, and for the government tax payments. R.: Oh, we in Russia understand the problem only too well. And how do they go about the problem?

F.: The solution to the problem is being sought through a combination of measures, such as bank recapitalization operations, debt restructuring, implementation of bankruptcy legislation.

R.: Eastern European countries have nearly completed the initial stage of the transformation to a market system. What tasks remain for them to accomplish?

F.: They are many. As the major ones I'd single out the need to complete the social security reform, to step up infrastructure investment, to overhaul local government finances, to deal with the difficult trade-off between the need to contain the fiscal imbalance and the need to pursue structural reform.

R.: And finally, the most important question. Do the people support the reforms?

F.: You have really raised the most important question. Sentiments are different, you know. The government's success of overhauling fiscal institutions and eliminating the fiscal imbalances depends on the broad-based support for the reforms.

R.: In this situation it's important to develop measures to shield the poor from the adverse effects of adjustment.

F.: I see you agree with me that designing and implementing fiscal policy is a major challenge for countries in transition.

Words you may need: reorder v изменять порядок revamp v исправлять

to tame high inflation (зд.) обуздать высокую инфляцию dislocation n нарушение

dampen v смягчать

all-encompassing аdj всеохватывающий finalize v окончательно определять arreas n pl задолженность

recapitalization n изменение структуры капитала overhaul v (зд.) осуществить перестройку trade-off n компромисс

contain v сдерживать sentiments n pl настроения shield v защищать

b) On Macroand Microeconomics

Russian: Economists know that there is considerable controversy about macroeconomic models because some of them do not match the fluctuations in actual economies. Besides, a lack of clear connection between macroeconomics and microeconomics has long been a source of discontent among economists. What is macroeconomics all about from your point of view?

Foreigner: Essentially, macroeconomics dates from Keynes and I stick to the concepts of Keynesian

policies, according to which macroeconomics is a branch of economics concerned with the analysis of the economy in the large.

R.: So, if I get you right, macroeconomists study such economic aggregates as total expenditure, income and production, employment, prices and wages, external trade flows, tax revenues and government spendings, the stock of money and so on.

F.: I'd say that they disaggregate the economy into homogeneous categories and then integrate the determinants of the behaviour of each of these aggregates to provide models of the whole of economy. R.: Is there a regularity in the behaviour of these economic aggregates?

F.: Yes. Economies develop in cycles. The term "cycle" refers to fluctuations in national economic activity over a period of time. Indicators of the cycle are variations in rates of economic growth, industrial output, capacity utilization, employment and price changes.

R.: What does the length of the cycle depend on?

F.: Fluctuations in the intensity of economic activity can be generated by both internal and external influences. For example, economic production may collapse for a number of reasons: natural disasters, hyperinflation or loss of political control, etc.

R.: As a result of cyclical development an economy may lose equilibrium. What indicators characterize economic equilibrium?

F.: First of all, it is aggregate demand and supply, then I'd mention the general price level, the unemployment rate, general consumption and investment. These are the aggregates that determine the output and the economic growth. If demand exceeds supply the economy is "overheating", which causes inflation, and if demand falls and is behind supply it brings about recession and growing unemployment.

R.: Now we've come to the most important question. How can macro-economic disequilibrium be eliminated?

F.: Economic laws cannot be changed. But governments can influence the economic development through their economic policies.

R.: This idea of the responsibility of the government has become widespread, but how can the government create the proper conditions for market forces?

F.: It is usually done with the help of macroeconomic research and analysis of factors determining volumes of production, employment, interest rates and prices, dynamics of tax collection and government spendings, money supply, as well as instruments underlying the elaboration of the economic policy. Besides, economists study the country's economic interactions with the rest of the world by analysing foreign trade flows.

R.: As you've said, the major macroeconomic index is the output. How is it determined?

F.: It can be done with the help of national accounts systems which are sort of macroeconomic statistical schemes for the presentation of the needed information on macroeconomic variables in a systematic way. For example, the System of National Accounts (SNA) has been used by market economies quite successfully for a number of decades.

R.: Yes, we know that the accounts of this system help to answer such basic economic questions as "What and how much does an economy produce?", "Which are the producing sectors?" and "How is the national income divided among the factors of production, notably labour and capital?"

F.: Summing up, I'd say that various indicators which are part of the SNA, allow to measure the total output

following:

a) Your understanding of fiscal federalism.

(Use: levels of government, taxation, revenue-raising powers, control over expenditure, autonomy of local government)

b) What is the federal government responsible for?

(Use: defence, law enforcement, universities, national parks, road construction) c) What are the regional and local governments responsible for?

(Use: construction, local environmental issues, local enterprises, cultural institutions) Ex. 15. Prepare a short talk on the following:

a)Changes in Russian fiscal picture accompanying the structural transformation of the Russian economy since 1992.

b)What do you think of the efficiency of fiscal management in Russia? A large share of government revenues and expenditures are not included in the budget, which violates the integrality and universality principles of government finance. Say what you think of extrabudgetary funds.

c)What is your idea of an effective fiscal policy?

d)How should intergovernmental fiscal relations in Russia be developing? How can they be streamlined? Ex. 16. Quote examples from financial publications, newspapers, TV programmes to illustrate fiscal problems some countries are facing. How do they resolve them?

READING PRACTICE

Ex. 17. a) Read the article quickly and find the definition of a country's balance of payments and the explanation of what the "current account" and "capital account" are.

b)Reread the article more carefully and compare the facts about the UK and the US with the situation in Russia.

Balance of Payments

Balance of payments is a country's set of accounts with the rest of the world, reflecting the relation between the payments of all kinds made from one country to the rest of the world and its receipts from all other countries. The accounts can be divided into the current account and the capital account. The current account is that part of the balance-of-payments account which shows all payments made or received in respect of goods and services, including payments of interest on past lendings or borrowings.

Thus, the current account or the balance of trade consists of several items:

• Visible trade is the imports and exports of tangible goods such as plant and machinery, consumer goods, raw materials.

• Invisible trade is trade in services such as banking, insurance, transportation and tourism.

• Transfer payments are things like the remittances of migrant workers to their homeland and the payment of dividends and interest to foreign companies, governments and international organizations.

• Unrequited exports are exports which are not exchanged for current imports, but the value of which pays interest on loans raised abroad, or profits on investment made in the home country by foreigners.

The capital account is that part of the balance of payments account which shows all payments made or received by way of settling old debts or creating new debts. It deals with financial transactions. The capital account consists of long-term investment – either direct foreign investment (e.g. a company in one country buying a company in another), or portfolio investment (e.g. a foreigner buying shares on Wall Street) – and

short-term capital flows of "hot money".

Many countries are faced with a severe balance-of-payments problem which arises from different local circumstances.

Britain, for instance, is a densely populated island and it has few natural resources left. Britain has problems to supply industry with its requirements. They have to import large quantities of food, minerals, timber, etc. In exchange, they sell large quantities of manufactured goods. Thus, the balancing of imports and exports is a permanent problem to the Government. The Treasury keeps the balance of imports and exports constantly under review.

The visible trade balance is almost always an adverse one and they should be permanently in debt to other countries were it not for the invisible items which are a second source of foreign earnings.

Britain's surplus on invisible earnings arises partly from their traditional skills and services, particularly in commerce, banking, insurance and finance. It also arises from Britain's overseas holdings of property and business enterprises. Besides, in Britain, with its large merchantile marine the earnings from shipping are an important source of foreign revenue.

In the US, exports of manufactured goods and farm goods are more than offset by imports of raw materials, expecially oil.

Governments may influence the balance of payments through measures of fiscal policy or monetary policy designed to affect levels of domestic demand or interest rates.

Words you may need:

balance of payments платежный баланс current account текущий счет

capital account счет движения капитала visible trade видимая торговля invisible trade невидимая торговля

transfer payments трансфертные платежи remittance n перевод (денежный) unrequited exports некоммерческий экспорт to settle a debt урегулировать долг

densely adv плотно, густо balancing n сбалансированность

invisible earnings поступления от невидимого экспорта merchantile marine торговый флот

offset v компенсировать, сводить на нет

Ex. 18. a) Read the article quickly and underline the parts about the challenge the transition economies face and the constraints affecting the ability of the governments to meet the challenge.

b) Reread the article more carefully and pick out facts explaining the changes in the social sphere in comparison with the past and the recommendations of international experts.

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 companyprovided 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:

•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

1direct budget deficit crediting – прямое кредитование бюджетного дефицита

2a 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