Economic Reform and Environmental Performance in Transition Economies

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Economic Reform and Environmental Performance in Transition Economies

WORLD BANK TECHNICAL PAPER NO. 446

Eastern Europe and Central Asia Pollution Management Series

Gordon Hughes Magda Lovei

The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W.

Washington, D.C. 20433, U.S.A.

Manufactured in the United States of America First printing September 1999

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ISBN: 08213−4564−8 ISSN: 0253−7494

Cover photo by Curt Carnemark, the World Bank, Estonia, 1993.

Gordon Hughes is senior advisor and Magda Lovei is an environmental economist in the Environment Department at the World Bank.

Library of Congress Cataloging−in−Publication Data has been applied for.

13. Trends in urban air quality by country group, 1989−96 link 14. Trends in emissions of air pollutants in hot spots, 1990−96 link 15. Trends in urban air quality in hot spots, 1990−96 link 16. Indicators of water pollution, 1990−96 link 17. Emissions of water pollutants in hot spots, 1990−96 link 18. Surface water quality in hot spots, 1990−96 link 19. Excess mortality due to air pollution by country group, 1990 and 1995

link

20. Excess cases of chronic bronchitis due to air pollution by country group, 1990 and 1995

link

21. Total costs of air pollution by country group, 1990 and 1995 link 22. Infant mortality rates by country group, 1990 and 1995 link 23. Actual versus expected rates of infant mortality by country

group, 1995

link

24. Estimated impact of improvement in water and sanitation on infant mortality by country group, 1995

link

25. Total burden of mortality and illness associated with environmental factors by country group, 1995

link

26. Relative burden of mortality and illness associated with environmental factors by country group, 1995

link

27. Relative burden of mortality and illness, selected countries link 28. Relative burden of mortality and illness for the NIS Northwest countries

link

29. Relative burden of mortality and illness for the NIS Southeast countries

link

Tables

1. Total lead emissions in selected transition economies, 1990 and 1996

link

A.1 Estimated coefficients for emissions of air pollutants link B.1 Dose response coefficients used in the study link

C.1 Variables used in the analysis link

C.2 Equations for mortality of infants and children under age 5 link

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C.3 Impact of water and sanitation on mortality rates in the ECA Region

link

D.1 GDP growth and GDP per capita in Central and Eastern Europe and the Newly Independent States

link

D.2 Inflation in Central and Eastern Europe and the Newly Independent States, 1989/93 and 1993/97

link

D.3 Motor vehicle use and change in Central and Eastern Europe and the Newly Independent States, 1990−96

link

D.4 Mortality and life expectancy in the Newly Independent States, Central and Eastern Europe, and the European Union

link

D.5 Dissolved oxygen levels in selected rivers link

Foreword

The transition to a market economy is expected to lead to environmental as well as economic improvement. In practice, realization of the expected gains may come slowly, especially for countries where economic reform and growth have lagged. This Technical Paper reviews progress in environmental trends since transition began. It looks at air and water pollution and health indicators in the region, over time, in comparison with worldwide trends and in light of the environmental issues identified in the Environmental Action Programme for Central and Eastern Europe.

As this study emphasizes, economic reform and commitment to introducing environmental regulations and programs are vital for reaching lasting environmental improvements. The paper points to the solid progress achieved in the advanced reform economies and to the less encouraging trends in slower−reforming countries. In the latter group, pressures on the environment decreased somewhat during transition only as a consequence of declining economic activity, while persistent problems remained in environmental "hot spots" around

high−polluting industrial centers.

This report continues and builds on the World Bank's work in analyzing the environmental effects of transition, restructuring, and privatization with a view to identifying priority areas for investment and policy initiatives.

KEVIN CLEAVER DIRECTOR

EUROPE AND CENTRAL ASIA

ENVIRONMENTALLY AND SOCIALLY SUSTAINABLE DEVELOPMENT

Abstract

Economic transition to a market economy is expected to yield environmental benefits as changing incentives foster more efficient production, better use of resources, and increased community input. A review of environmental and health conditions in the countries of Central and Eastern Europe (CEE) and the newly industrialized states (NIS) shows that pollution has declined across the area, but for different reasons. In the slower−reforming countries, reduced pollution may be simply the temporary effect of an economic downturn and could be erased when growth resumes. By contrast, the advanced reformers, mainly in the CEE group, have made solid gains in improving energy efficiency and reducing emissions intensity of pollutants. Both groups of

countries inherited environmental "hot spots" where highly polluting activities cause poor environmental quality.

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The report looks at the key environmental issues identified in the 1993 Environmental Action Program for Central and Eastern Europe, including air and water pollution and the associated health burdens. The concept of a

disability−adjusted life−year (DALY) was used, along with other indicators, to assess the health effects of changes in environmental conditions under the transition.

Damages from air pollution have declined in the CEE group but have increased in the NIS, partly because of the general worsening of the health status of the population. Water quality depends greatly on local infrastructure, which has deteriorated in the economically hard−hit NIS. Nevertheless, infant mortality rates do not indicate any increase in water−related deaths and disease, except in some countries. Although use of agricultural fertilizers and pesticides might be expected to lead to a decrease in nitrate−laden runoff, nitrate levels in rural drinking water do not appear to have improved significantly.

Air pollution and dirty water are more serious problems in the NIS than in the CEE group. Within the NIS, air pollution is the more important problem in the northwestern part, and clean water is a high priority in the southeastern countries, especially in rural areas. International and country efforts should reflect these differing concerns and needs.

Acknowledgments

This report was prepared as a contribution to a forthcoming report by the Organisation for Economic

Co−operation and Development (OECD), Environment in the Transition to a Market Economy. The preparation of the report was supported by the Environmentally and Socially Sustainable Development Sector Unit of the Europe and Central Asia Region, and the Environment Department of the World Bank.

The authors thank Tony Zamparutti and Glen Anderson for contributions and comments, Jennifer Steedman for data analysis, and Milen Dyoulgerov for research assistance. The report greatly benefited from constructive and helpful comments by Michele de Nevers, David Hanrahan, Kseniya Lvovsky, and Paavo Eliste from the World Bank; Brendan Gillespie and others from OECD; and experts from Central and Eastern Europe and the newly independent states who reviewed the paper. The authors would like to express their thanks to Nancy Levine for editorial assistance, Jim Cantrell for desktop publishing, and to Sriyani Cumine for administrative support.

Abbreviations and Acronyms

CB Chronic bronchitis

CEE Central and Eastern Europe COI Cost of illness

CO2 Carbon dioxide

CVM Contingent valuation method DALY Disability−adjusted life year EAP Environmental Action Programme EBRD European Bank for Reconstruction and

Development

ECA Europe and Central Asia Region

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EU European Union GDP Gross domestic product IEA International Energy Agency MPC Maximum permitted concentration NIS Newly independent states

NOx Nitrogen oxides

OMR Operation, maintenance, and repair PM Particulate matter

PM25 Particulate matter smaller than 2.5 microns in diameter

PM10 Particulate matter smaller than 10 microns in diameter

QWB Quality of well being SO2 Sulfur dioxide

TSP Total suspended particulates VOSL Valuation of a statistical life

UNECE United Nations Economic Commission for Europe

USEPA United States Environmental Protection Agency

VOC Volatile organic compound WHO World Health Organization WTO World Trade Organization WTP Willingness to pay

Executive Summary

The transition from centrally planned to market economies started almost a decade ago in Central and Eastern Europe (CEE) and the newly independent states (NIS). As emphasized by the Environmental Action Programme for Central and Eastern Europe—a document endorsed by the environmental ministers of 50 countries in

1993—the economic reform and restructuring associated with the transition were expected to eliminate the perverse incentives that underlay many of the environmental problems of centrally planned economies. It was also recognized, however, that economic reform had to be harnessed by effective environmental policies, institutions, and investments to achieve lasting environmental improvements. This study attempts to evaluate how the transition affected the environmental performance of faster− and slower−reforming economies, tracing the combined effects of economic growth, reform, and environmental interventions on environmental trends in the region.

All countries in the region experienced more or less severe economic recession after their transition started.

However, the depth of recession and the speed of economic recovery showed significant differences, strongly influenced by progress in implementing economic reform. Advanced reform countries managed to turn around

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their economies faster than slowerưreforming countries.

Economic recession, which led to declines in economic output, industrial production, and energy use, contributed to reduced pollution loads in the entire region. However, in advanced reform countries, total emissions of key air pollutants such as particulates, sulfur dioxide, and nitrogen oxides have fallen more than gross domestic product (GDP), while in the slowerưreforming countries they have fallen approximately in line with GDP. The analysis presented in the paper indicates that advanced reform countries have managed to achieve a clear and sustained reduction in the emissions intensities of key air pollutants; that is, the changes associated with economic reform have produced real and lasting environmental benefits in these countries. By contrast, there has been little evidence of any significant improvement in emissions intensities in slowerưreforming countries.

While the reductions in emissions have generally improved air quality, the improvements have not been proportionate to emissions reductions because of pollution from small sources such as households and growing traffic in urban areas. In addition, emissions of pollutants have fallen less rapidly and air quality has improved less markedly in environmental ''hot spots" than in the respective country groups on average. These results suggest that progress toward translating overall improvements in emissions into better environmental quality, especially for those living in the most polluted regions, has been relatively slow.

While trends in water pollution from industrial sources have generally followed air pollution trends, the impacts of other sources, such as municipal waste, on water pollution have often been more important than changes in industrial activity. Maintenance and

investments in municipal water, sanitation, and wastewater treatment infrastructure seem to be at least as important in determining water quality as economic restructuring. While several countries, especially in CEE, have achieved significant improvements in municipal infrastructure and wastewater treatment, water

infrastructure has generally deteriorated during the transition in the slowerưreforming countries of the NIS group.

The use of fertilizers and pesticides has declined in both advanced reform and slowerưreforming countries. As a result, a decline in agricultural fertilizer runoff to water bodies must have occurred, especially in

slowerưreforming countries, where the decline in fertilizer use has been greater. However, nitrate levels in rural drinking water, a significant environmental health problem in many countries in the region, do not appear to have improved significantly. Recent data indicate that this has remained a serious concern in, for example, Estonia, Kazakhstan, and Romania.

Water quality in some rivers has improved somewhat—in the Czech Republic, for example—but other countries (Armenia, Hungary, Poland, and the Slovak Republic) have recorded little significant change. In some hot spots, modest improvements have been measured, but in several others, typically in slowerưreforming countries, levels of industrial pollutants have actually increased. Examples include Bulgaria's Maritsa Basin and the VolgaưUrals region in the Russian Federation.

Environmental problems are associated with serious health damage. The two largest components of overall health damage associated with air pollution are premature deaths and chronic bronchitis, which result primarily from exposure to particulates. Using economic valuation techniques, this study estimates the monetary costs of damage associated with air pollution in a group of 57 cities in transition economies at about $6 billion a year—as much as 5 percent of total urban income in the midư1990s. 1 Economic damages associated with air pollution have declined in CEE but have increased in the NIS, where small improvements in urban air quality could not compensate for the general worsening of the health status of the population.

Waterưrelated problems are a key determinant of the levels of infant mortality and waterborne disease.

Historically, the economies now in transition had relatively low infant mortality rates in comparison with

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countries at similar income levels, especially in the CEE and NIS Northwest group. 2 During transition, there has been no evidence of increasing water−related ill health except for the NIS Northwest country group, where average infant mortality rates increased during the early 1990s. The proper maintenance of the existing water and sanitation infrastructure should receive special attention in these areas. Infant mortality rates have generally declined in the region, with the largest declines occurring in the NIS Southeast country group.

Both air pollution and dirty water are more serious problems throughout the NIS than in CEE countries. The overall environmental burden on health and the relative importance of air and water pollution are also distributed unevenly between the northwestern and southeastern parts of the NIS. Air pollution causes over three times more damage than dirty water in the Russian Federation and Ukraine, whereas in Azerbaijan and Central Asia the ratio is reversed. Among CEE countries, the largest relative burdens are associated with dirty water in Albania and air pollution in Bulgaria. The heaviest costs of environmental damage are found in the NIS Southeast countries: air pollution in Azerbaijan and dirty water in Azerbaijan, Kazakhstan, Tajikistan, Turkmenistan, and Uzbekistan.

Future environmental interventions should target these problem areas.

Chapter 1—

Overview of Progress in Economic Transition

Transition to a market economy, for all its long−term rewards, is not an easy process. In addition to the necessary but often difficult social, political, and economic adjustments, the countries of Central and Eastern Europe (CEE) and the newly independent states (NIS) have had to cope with a legacy of inefficient industries, obsolete and polluting technologies, and weak environmental management and regulation. In addition, past limitations on civic activities and on dissemination of information meant that mechanisms for bringing public pressure to bear on environmental issues were stunted or lacking. This inherited burden led to serious environmental and health problems and to dangerous environmental "hot spots."

The Environmental Action Programme (EAP) for Central and Eastern Europe, which was endorsed by the environmental ministers of 50 countries during the 1993 Environment for Europe Conference in Lucerne, Switzerland, identified a number of serious environmental problems requiring immediate and urgent attention.

They included:

• High levels of airborne particulates from coal burning by domestic sources, small−scale enterprises, power and heating plants, and metallurgical plants

• High levels of sulfur dioxide and other gases, especially in combination with particulate matter, emitted from power and industrial plants and from household burning of high−sulfur coal and fuel oil

• Lead in air and soil stemming from emissions from industry and transport using leaded gasoline

• Contamination of drinking water, mainly by nitrates originating from agricultural enterprises and by heavy metals and toxic chemicals originating from industries.

A central principle of the EAP was that the process of economic reform and restructuring would eliminate the perverse incentives that underlay many of the environmental problems of centrally planned economies (Box 1).

At the same time, it was recognized that economic reform alone was no panacea. Effective environmental

policies, institutions, and investments would be needed to harness the positive forces of market reform and match the environmental performance of more developed economies. This, in turn, would require economic stability and the prospect of sustained economic growth, to encourage governments and industrial enterprises to take the steps required to make more efficient use of energy and natural resources, mitigate pollution, and enhance the positive

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environmental effects generated by economic reform.

More than five years have passed since the EAP was endorsed. Significant progress has been made in many countries introducing environmental initiatives at the national, regional, and local levels. International cooperation has supported many of these efforts. However, transition has proved to be a much longer and more difficult process than most had anticipated, and progress has varied. By 1998 only one country, Poland (which embarked on economic reform before the rest of the region), had reestablished sustained

Box 1. Reform and environmental benefits Economic reform measures are expected to lead to significant environmental benefits:

• The elimination of price controls and subsidies , especially for fuels, generally leads to an initial increase in the costs of production and thus promotes adjustment of production processes, energy and resource savings, and restructuring of industry toward less resource−intensive sectors.

• The imposition of a hard budget constraint, coupled with changes in the incentive structure of enterprises, encourages managers to improve the efficiency of their operations, reduce waste, and improve the overall management of resources.

• Privatization and favorable conditions for foreign investments are expected to improve corporate governance, efficiency, profitability, and access to financing−making possible the renewal of outdated, highly inefficient, and polluting capital stock.

• Trade and market liberalization increases the exposure of enterprises to international market requirements, management and environmental practices, and enhances their access to cleaner production technologies.

Implementation of the above reforms has begun in most CEE countries, but the reforms have not been undertaken in a substantial way in the NIS.

economic growth and surpassed the pretransition level of real gross domestic product (GDP). Several NIS countries have still not progressed very far in their economic reform programs or achieved even a modicum of economic stability; their real GDP levels are little more than one−half of those before transition. Lower

production has meant reduced volumes of pollution, especially air and water pollution from large enterprises, but unless efficiency and environmental performance are improved, any short−term reductions may easily be reversed when production levels recover.

This study attempts to evaluate the combined effects of economic reform and other measures on environmental performance in the transition economies since 1989−90. It examines several underlying factors—economic growth, industrial structure, energy intensity, and the composition of fuel use—that affect trends in volumes of emissions, emissions intensities, and ambient environmental quality. This chapter first examines how advanced

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reform countries 3 have managed to improve their environmental performance in comparison with slower−reforming transition economies and then assesses the impacts of economic reform and additional environmental measures undertaken at the local, regional, national, and international levels.

Many environmental problems remain to be addressed, even in the most successful reformers. The study sets out to quantify the cost of environmental damage in different countries as a basis for comparing current priorities which appear to present significant threats to human health to determine whether the priorities identified in the EAP remain valid for the new millennium. This overview covers all countries in the region including NIS Southeast countries which were not included in the EAP. The study does not cover issues that have a less pervasive effect on human health in the region. More generally, this study does not attempt to review the state of the environment in the region which is covered, for example, by the European Environment Agency's recent report: Europe's Environment: The Second Assessment, presented at the 1998 Environment for Europe Conference in Århus, Denmark.

Reform, Economic Growth, and Restructuring

The countries of the region started the transition with widely differing capabilities and have progressed at very different rates. The NIS countries that emerged following the breakup of the Soviet Union have had to cope with the disintegration of economic and political links, as well as the difficulties of establishing new monetary and fiscal systems. Many of them face significant barriers in their efforts to develop new markets, and they lack the commercial traditions, human resources, and access to expatriate communities with capital that have eased the transition for many CEE countries.

On average, GDP per capita for the NIS countries is much lower than for the CEE countries (Table D.1). The severe drop in oil and commodity prices during 1998, combined with lower real exchange rates, will mean a substantial decrease in GDP per capita measured in U.S. dollars. GDP per capita for Russia and Belarus, for example, will have fallen substantially in 1998, thus widening the gap between the two

country groups. The differences in real living standards are not quite as large as the figures imply, since the estimates rely on current or weighted average exchange rates rather than purchasing power parity (PPP) rates.

Recent estimates of PPP rates for the CEE countries suggest that the better−off countries such as the Czech Republic, Hungary, and Slovenia have real incomes per capita that are not far behind those in Greece and Portugal, the poorest member states of the European Union (EU).

The Pace of Reform

Progress in implementing economic reform has been uneven among CEE/NIS countries. In advanced reform countries, state−owned enterprises have been privatized or at least subjected to much stricter budget constraints than before. Subsidies for energy and natural resources have been reduced, although usually not entirely eliminated. Tax systems have been restructured, and efforts have been made to improve both the collection of taxes and the enforcement of regulations, including those relating to environmental performance. Overall, the cumulative impact of these reforms in CEE countries has been to bring them much closer to the market economies of Western Europe, increasing the gap between the CEE and NIS economies.

By contrast, many NIS countries have continued to shield their enterprises from market forces through indirect subsidies, including loans from government banks, and by tolerating large tax and payment arrears (Box 2). As a result, industrial restructuring has proceeded slowly in these countries, and the limited progress in privatization has not yielded the expected benefits. Unlike the situation in advanced reformers, where privatized enterprises improved their economic performance, progress has been disappointing in the NIS. There, ownership was often transferred to former employees or managers without changes in economic incentives, management practices,

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traditional ties to government, or dependence on budget support.

Throughout the region, there is growing recognition that the relatively rapid pace of liberalization and

privatization has not been matched by the development of the institutions necessary to support a well−functioning market economy. The advanced reform countries have made some progress, but

Box 2. Perverse incentives against industrial restructuring in "virtual economies"

Governments in many slower−reforming NIS countries have remained largely unwilling to cut the traditional ties between enterprises and the state, introduce hard budget constraints and industrial reform, and insist on the bankruptcy of unviable firms. Subsidies have been maintained, largely in the form of tax arrears. The result is what Gaddy and Ickes (1998) call a "virtual economy" in which enterprises do not add value and operate by

nonmonetary means such as barter. Russia's largest companies, for example, have been reported to conduct more than 70 percent of their business by nonmonetary means. Bankruptcies and the entry of new firms are very rare, hampering the growth of a real competitive environment Pure survival and rent−seeking rather than profit−maximizing behavior become the main characteristics of enterprises in the virtual economy.

No significant industrial restructuring has taken place in these slow−reforming NIS countries. Enterprises are more interested in maintaining employment, avoiding taxes, and keeping up good relationships with business partners and government officials than in producing profits that would be heavily taxed.

Exports are frequently pursued only to obtain the cash necessary to pay wages in the otherwise cashless economy. Economic performance is therefore

extremely weak−often much weaker than official statistics indicate. As Gaddy and Ickes show, in Russia, for example, the volume of real spending on plant and equipment in the manufacturing sector in 1997 was about 5 percent of the 1990 level, and investment in all productive sectors was about 17 percent of the 1990 level.

The ability of the public sector to collect and efficiently reallocate tax revenues throughout the economy is severely limited in virtual economies:

because taxes are paid in kind, the supply of goods and services, rather than efficiency considerations, determines public spending.

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The lack of economic reform has also severely limited improvements in environmental performance:

many firms have done little to improve their

productivity or to invest in environmental protection.

Instead, soft credits and waivers for pollution charges become part of the system of government support to enterprises.

inadequate institutional arrangements in slower−reforming countries have resulted in serious distortions that vested interests have been able to exploit, often at significant social and environmental cost. The subsequent high levels of poverty and inequality have fueled disillusion with market reforms and have further undermined the authority of governments to establish effective institutions.

Economic Trends

All countries in the region experienced a more or less severe recession at the beginning of the transition, but there have been large differences in the depth of the recession and the speed of recovery. Success in reinstating

economic stability and growth has been strongly influenced by progress in implementing market reforms (EBRD 1997). Most countries had negative average growth rates during 1990−96 (Figure 1). However, the countries of the former Soviet Union (including the Baltic states) experienced larger falls in real GDP than the CEE countries (other than those affected by war).4 Despite occasional setbacks, advanced reform countries have succeeded in turning their economies around much sooner than slower reformers. They achieved a reasonable degree of macroeconomic stability, 5 with nominal interest rates in the range 10−20 percent per year, implying positive real interest rates that provide a genuine incentive for saving and investment, and they had firmly reestablished economic growth by 1994−95 (Table D.1). Although by 1998 only Poland's real GDP was significantly higher than in 1989, most of the other CEE countries could expect to achieve this goal within five years, given

reasonable external circumstances (including strong support from the EU). Two of the CEE countries, Bulgaria and Romania, have renewed economic reform efforts in recent years, which should bring sustained growth. On the other hand, political instability in the Balkans, including the wars in the former Yugoslavia, has caused severe economic problems and uncertainty for these countries. It is likely to take at least 10 years for the NIS countries to surpass their real GDP levels at the end of the 1980s.

The liberalization of controlled prices, combined with weak monetary discipline, led to severe episodes of

inflation in almost all countries. As shown in Table D.2, by 1993 the general price level had risen to more than 10 times its 1989 level in all of the CEE countries except the Czech Republic, Hungary, and the Slovak Republic.

Most NIS countries experienced some form of hyperinflation, with 1993 prices soaring to more than 200 times their 1989 levels. A few countries, notably the Kyrgyz Republic and Moldova, managed to establish some kind of price stability after 1993, but severe inflation remains a major barrier to the reestablishment of economic stability in many NIS countries. For example, between 1993 and 1997 average annual price increases were about 350 percent in Belarus (even higher in 1998) and 250 percent in Azerbaijan. Worse still, inflation rates have varied greatly from year to year as a result of erratic economic policies, and there are no mechanisms for monetary correction to protect savers and investors from the confiscatory effects of inflation.

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Figure 1.

Average GDP growth rates between 1989 and 1997/98

Under such circumstances it makes no sense for any enterprise to invest time, labor, and money in anything that will not produce an almost immediate return. Even simple measures to improve output and productivity or to reduce the waste of energy or raw materials are of little significance in comparison with efforts to take advantage of the fiscal and monetary distortions created by rapid and fluctuating rates of inflation. In addition, high inflation and political, legal, and other uncertainties increase the risks and costs of long−term financing, further delaying investments in the replacement of outdated, highly polluting capital stock and in other environmentally beneficial improvements. Thus, it is unrealistic to expect any substantial progress toward better environmental performance or, specifically, an increase in environmental investment until the core elements of macroeconomic stability are in place. This means that special environmental financing mechanisms such as environmental or pollution abatement funds are likely to have only a marginal impact on the overall environmental performance of the enterprise sector.

Such funds can address severe environmental problems that pose an imminent threat to human health or critical ecosystems, but they cannot correct the underlying weaknesses of the macroeconomic and policy framework.

Trends in Industrial Output and Energy Intensity

The EAP predicted that structural changes generated by the process of economic reform during transition would be beneficial to the environment. Reform was expected to promote a shift from heavy industries toward less resource− and pollution−intensive sectors, improvements in the efficiency of resource use, and a switch from dirtier fossil fuels such as coal toward cleaner fuels such as gas. This section reviews actual changes in these areas.

Industrial Production

Figure 2 shows average trends for GDP and industrial output between 1989 and 1996 for the advanced reform economies and for slower reformers. As noted above, the transition process precipitated a collapse in GDP and industrial output in all countries, but the advanced reformers stabilized and turned their economies around far earlier than did the slower reformers, some of which have faced renewed economic instability and crises in recent years.

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Figure 2.

GDP and industrial output by country group, 1989−98

Industrial output has fallen more sharply than GDP in both country groups, but the overall shift in the sectoral composition of GDP away from industry has been greater in the advanced reform economies. Indeed, in the slower reformers, the industrial sector started to recover in 1995, although aggregate GDP was still falling. In 1998 industrial output fell as GDP recovered slightly. Within the industrial sector, the initial decline in output from heavy industry, including chemicals and metallurgy, was particularly marked. These sectors have recovered somewhat since 1994 but still account for a significantly lower industrial output than in the late 1980s.

Energy Intensity

Absolute levels of energy intensities have traditionally been high in all transition economies, but especially in the slower−reforming countries. Even in 1995 the average energy intensity of GDP in those countries was nearly twice its value in the advanced reform countries. Allowing for differences in climate and other factors, the slower−reforming countries have much greater opportunities for improving their energy efficiency; thus, the only modest improvements made so far represent an important loss of opportunity.

International experience shows that the amount of energy consumed to produce a unit of GDP tends to decrease with increasing levels of GDP. From this

viewpoint, CEE/NIS countries have consumed excessive amounts of energy per unit of GDP at the start of the transition. In 1990 "excess" energy consumption the difference between expected consumption based on GDP per capita and actual consumption, expressed as a percentage of total consumption—reached more than 80 percent in Kazakhstan and Ukraine, more than 70 percent in Azerbaijan, Bulgaria, the Russian Federation, and the Slovak Republic, more than 60 percent in Bulgaria and Poland, and almost 50 percent in Hungary, resulting in high pollution intensities. Figure 3 presents the 1990 energy consumption figures for five transition countries compared with the international trend. 6

During the transition, energy use decreased measurably in advanced reform countries, and it fell drastically in slower reforming countries, where 1996 energy use stood at half its 1989 level. However, the response of the transition economies to the dual challenge of modernizing their energy and industrial sectors and improving efficiency has been far from uniform. Most advanced reformers managed to put in place the institutional

foundations for a lasting transformation from a centrally planned to a market−based system. Rapid adjustment of energy prices to reflect costs, the enforcement of payment discipline, and large−scale privatization of industrial

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firms have decreased the energy intensity of the economy; "excess" energy consumption declined in the advanced reform country group from 70 percent in 1990 to 57 percent in 1995 (Figure 4). Especially significant

improvements have taken place in the Czech Republic, Hungary, and Poland, where "excess" energy consumption declined by 12,13, and 17 percentage points, respectively (Figure 5).

Figure 3.

Energy consumption and GDP in transition economies compared with international trend, 1990

Figure 4.

"Excess" energy consumption by country group, 1990 and 1995

By contrast, most slower reformers have hesitated to embark on reforms or have failed to follow through on initial commitments. In some cases, as in Belarus, initial reform was halted. In others, such as Ukraine, implementation of reforms has been slow and uneven. As a result, in the slower−reforming country group, energy consumption remained nearly as "excessive" in 1995 as at the beginning of the transition (Figure 4).

There were, however, significant differences among individual countries. Energy intensities worsened and

"excess" energy consumption increased in several countries, including Azerbaijan, Bulgaria, and the Kyrgyz Republic, where no significant reform took place during this period. Little change in "excess"

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Figure 5.

"Excess" energy consumption in selected advanced− and slower−reforming countries, 1990 and 1995

energy consumption occurred in the Russian Federation and Ukraine, whereas in some cases (for example, Kazakhstan and Romania)there was noticeable improvement. While the data show significant improvements in some slower−reforming countries such as Albania, Armenia, and Georgia, these improvements were mostly due to the impact of war and severe restrictions on household energy consumption rather than to the effects of

structural changes and improvements in efficiency. Overall, the advanced reform countries have started to narrow the gap between their energy efficiency and the energy efficiency of market economies. Slower reformers failed to achieve similar improvement in this area in the first half of the decade.

Fuel Use: Composition and Trends

Changes in Composition

The composition of total energy use has changed in many countries but most significantly in the

slower−reforming economies. Figure 6 shows the average decrease in the consumption of different categories of fuel between 1989 and 1995.

In both the advanced and slower−reforming country groups, consumption of solid fuels has fallen by more than total energy consumption, while consumption of gas has declined by about the same as total energy. The shifts in the composition of energy consumption have been small in the advanced reform countries but large in the slower−reforming countries. The consumption of petroleum products has also fallen more rapidly in the

slower−reforming countries than has that of all energy. These shifts reflect a combination of demand and supply factors. The opportunity costs of operating nuclear and hydroelectric power plants are small relative to those of thermal power plants, so that it makes sense to utilize as much as possible the capacity of existing facilities of these sources while placing the burden of adjustment to lower demand on plants that use fossil fuels. On the demand side, even limited adjustments in relative prices have favored a shift away from coal and heavy fuel oil toward gas, and institutional factors have reinforced this trend.

Fuel Use: Composition and Trends 17

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Figure 6.

Trends in primary energy consumption, 1989−95

The switch from coal and, in the slower−reforming countries, petroleum products toward gas was even stronger for final consumption (i.e., excluding power generation and other types of energy conversion) than for primary consumption of energy in both groups of countries, indicating that the decline in coal use outside the power and heating sectors has been larger than its overall decline. Price adjustments and convenience both suggest that the share of coal in final consumption is likely to continue to fall.

Coal Combustion by Small Sources

From an environmental perspective, any shift from coal toward the use of gas, but especially outside the power sector, is beneficial because of the resulting reductions in emissions of air pollutants such as particulates and sulfur dioxide. The most damaging type of fuel use is the burning of coal in stoves and small boilers operated by households, small businesses, and service establishments. Emissions from these sources typically represent a disproportionately larger source of damage to human health than emissions from large stationary sources, such as power and industrial plants, because the small sources are closer to people and it is more difficult to control their emissions.

Historically, as noted by the EAP, the combustion of coal by small sources such as households, municipal

buildings, and small commercial boilers represented a serious air pollution problem in many transition economies, including Armenia, the Czech Republic, Estonia, Georgia, Latvia, Poland, Russia, Ukraine, and parts of

Kazakhstan and the Kyrgyz Republic.

It is not possible to measure fuel use in small sources directly, but the consumption of coal by sectors other than energy conversion (including power and heating plants) and manufacturing industry pro−

vides a reasonable indication. Figures 7 and 8 show trends in such use for the two country groups, along with the other major category of fuel consumption by small sources, motor gasoline. The strong downward trend in the use of coal by small sources is clear for both groups of countries.

The downward trend in coal consumption is likely to continue for some time because in many countries the relationship between the prices of coal and substitute fuels, especially gas, remains more favorable to coal than would be the case if these prices fully reflected world market prices (appropriately adjusted for fuel quality and heating value). For example, the price of coal in Poland is now above export parity, but coal prices are still implicitly subsidized in the other main producing and consuming countries, including the Czech Republic, Romania, Russia, and Ukraine. By contrast, average prices for natural gas and petroleum products have typically

Coal Combustion by Small Sources 18

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exceeded import parity, except in Russia, where gas prices have been controlled to subsidize both household and industrial consumers. As these pricing distortions are gradually corrected, it is likely that the share of coal in the energy consumption of households and other small sources will continue to decline. In time, coal will be used almost entirely for power generation and by certain large industrial consumers, as is the pattern in Western Europe today.

Motor Fuels Consumption

Another aspect of the energy transition is that the use of petroleum products for transport fell by significantly less than GDP in both groups of countries. This gap was especially marked for gasoline in the advanced reform countries. Consumption of motor fuels has been rising strongly since 1993−94 in these countries, and there are signs of a similar recovery in the slower−reforming countries from 1995 onward. The reason for the recovery has to do with a substantial growth in vehicle fleets in almost all the CEE countries and in several NIS countries (Table D.3). Data indicate a median increase of 33 percent over six years (nearly 5 percent per year) even though GDP declined, on average, nearly 20 percent. In Belarus, Russia, and Ukraine, vehicle numbers have grown even more rapidly, despite larger falls in GDP. Such growth may reflect the extent to which the ownership of motor vehicles was held down under the previous economic system.

Figure 7.

Indices of fuel use by small sources in advanced reform countries, 1989−95

As one would expect, the number of vehicles per 1,000 people is closely correlated with GDP per capita. (The figures for Armenia and Tajikistan seem to be anomalies.) Some countries, such as Estonia, the Czech Republic, and Slovenia, however, have markedly higher levels of automobile ownership than would be predicted by their levels of GDP per capita (OECD/IEA 1997).

Most of the increase in motorization has been concentrated in urban and metropolitan areas. The average annual growth rate of passenger car numbers reached almost 7 percent in Warsaw and 5 percent in Budapest between 1985 and 1994. The growth in vehicle numbers appears to be especially high in some NIS cities. In Moscow, for example, the fleet size almost tripled during 1985−94, with an average annual growth rate of about 11 percent, rising to more than

Motor Fuels Consumption 19

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Figure 8.

Use of fuels by small sources in advanced reform countries, 1989−95

17 percent between 1990 and 1994 (TME 1995). Even in some NIS countries where the total number of vehicles declined or stagnated, urban traffic increased considerably. In Almaty, for example, the vehicle fleet grew more than 15 percent a year between 1990 and 1996.

In advanced reform countries, many of the new passenger cars have been more modern vehicles with lower emission levels, than used under central planning. This shift has been supported by vehicle emission regulations, inspection programs, the introduction of cleaner fuels, and the import regulations favoring less polluting, newer vehicles. By contrast, vehicle emission requirements and inspection and maintenance programs have remained unenforced and ineffective in many of the slower reforming NIS countries. There is anecdotal evidence of the illegal import of old second−hand vehicles, uncontrolled and poor quality fuel, and fuel additives such as tetra−ethyl lead in many large urban areas, motor vehicles have become the most important source of air pollution.

Chapter 2—

Air Pollution

The economic forces described in Chapter 1, reinforced by new environmental policies and investments, were expected to improve urban air quality by reducing emissions of the main air pollutants. In this chapter, we review the most important trends, assess the extent to which improvements reflect only a reduction in economic activity or represent a genuine reduction in emissions per unit of output, and examine to what degree lower emissions have been translated into improvements in urban air quality, particularly in ''hot spots."

Trends in Total Emissions

Figures 9 and 10 show the average trends of emissions of dust (particulate matter, or PM), sulfur dioxide (SO₂ ), nitrogen oxides (NOx), and carbon dioxide (CO2 ) for advanced and slower−reforming countries. The trend in GDP is included to show how pollutants have changed in relation to changes taking place in the economy as a whole.

In the advanced reform countries, total dust emissions have fallen by much more than GDP and continued to fall even as GDP levels started to grow. Emissions of dust fell the most sharply. In these countries, economic

Chapter 2— Air Pollution 20

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restructuring and environmental measures appear to have played an important role in reducing these air emissions.

Emissions of SO2 and NOx have fallen less, but still more rapidly than GDP: the fall in output, rather than economic restructuring or environmental protection efforts, appears to have been the main factor. In the slower−reforming coun−

Figure 9.

Indices of emissions of air pollutants in advanced reform countries, 1989−96

Figure 10.

Emissions of air pollutants in slower−reforming countries, 1989−95

tries, emissions of most pollutants have fallen approximately in line with GDP. At the beginning of the transition, CO₂ emissions fell quite sharply, but this reflected an existing trend in the former Soviet Union toward

substituting gas for coal and petroleum as gas transmission and distribution networks were developed to exploit discoveries of large gas fields.

Lead emissions have declined in all transition countries because of reduced industrial emissions and less intensive use of lead in gasoline (Table 1). Measures for abatement of lead emissions have been undertaken in several large industrial plants, especially in CEE countries, leading to decreased industrial lead emissions around these plants

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despite the recovery of economic activity. Less progress has been made in abatement of industrial pollution in NIS countries, where declining industrial emissions have come about primarily because of reduced production.

(In Uzbekistan lead emissions from industry were more than halved.)

The effects of reduced industrial emissions in CEE countries have been clearly reflected in declining human exposures around metallurgical plants. In Kurdzhali, Bulgaria, for example, blood lead levels declined by 31 percent between 1991 and 1995 as a result of improved dust control at the lead smelter. In Chorzow, Upper Silesia, Poland, mean blood lead levels for a large sample of children were between 2.7 and 7.5 micrograms per deciliter (µ g/dl) in 1994, 40 percent less than in 1988−90 (Lovei and Levy 1997). In Pribram, Czech Republic, average blood lead levels near a smelter dropped from 37.2 µ g/dl during 1986−90 to 11.4 µ g/dl during 1992−94 (OECD 1998). Such levels correspond to the range of blood lead levels measured in smelter communities in the west. In other communities, too, the proportion of children with elevated (higher than 10 µ g/dl) blood lead levels has been falling. Findings are similar in Poland, but the proportion of children with blood lead levels higher than 10 µ g/dl is still unacceptably high.

CEE countries have made great progress in phasing out leaded gasoline. During the late 1980s and early 1990s maximum permitted lead concentrations were gradually reduced from levels as high as 0.70.8 grams per liter (g/l) of gasoline to 0.15 g/l. In addition, unleaded gasoline was introduced and was promoted by differentiated taxation and by measures to encourage the use of vehicle emissions control devices. The Slovak Republic phased out leaded gasoline completely by 1995, and Hungary by 1999. Most other advanced reformers are planning to complete the phaseout of leaded gasoline by 2000. (For a perspective, see Box 3 on targets.) Less progress has been made by slower reformers among the CEE countries (e.g., Bulgaria and Romania), where leaded gasoline dominates domestic consumption. In Bulgaria blood lead levels among people living near traffic sources continue to be two to three times higher than in similar locations in Western Europe (OECD 1998).

A reduction in lead added to gasoline has been observed throughout the NIS countries, but not because an intentional effort was made to remove it. Rather, the low−octane requirements of the old vehicle fleet and the availability of excess refining capacity allowed the production of gasoline without the addition of lead (Lovei 1997). Without policies to support lead phaseout, the recent reductions in vehicular lead emissions in NIS countries may be reversed in the future as the size and octane demand of their vehicle

Table 1. Total lead emissions in selected transition economies, 1990 and 1996

1990 1996 Decline (percent )

Belarus 748.0 24.5 97

Bulgaria 432.6 251.9 42

Croatia 468.0 286.7 39

Estonia 183.9 51.9 28

Kazakhstan 1,770.0 1,509.0 15

Lithuania 46.3 17.4 62

Poland 1,395.8 1,025.6 26

Slovak Republic 166.7 91.7 45

Ukraine 3,655.4 897.9 75

Uzbekistan 626.8 312.5 50

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Source: World Bank estimates based on DEPA 1998.

Box 3. PanưEuropean strategy to phase out leaded gasoline

Lead phaseout received strong political attention at the Third Environment for Europe Conference in Sofia in October 1995. As a followưup, at the initiative of the

government of Denmark and the United Nations Economic Commission for Europe (UNECE) a task force was created to prepare a panưEuropean lead phaseout strategy.

The strategy proposed by the task force set out the following objectives:

• By January 1, 2005, leaded gasoline will not be marketed in European countries.

• As intermediate targets, countries undertake to reach an 80 percent market share of unleaded gasoline by January 1, 2002, at the latest and set a maximum limit for lead content in gasoline of 0.15 g/l by January 1, 2000, at the latest, with the lead content of unleaded gasoline not exceeding 0.014 g/l.

The strategy was submitted to the Fourth Environment for Europe Ministerial

Conference in Arhus, Denmark, in June 1998. Through the Ministerial Declaration, it was adopted by all UN/ECE countries present at the Conference, except Armenia, the Russian Federation, Uzbekistan, Turkey and FYR of Macedonia, who reserved their position on the final phaseout date and called for a delay until 2008. Additionally, 33 Parties to the Heavy Metals Protocol under the Convention on LongưRange

Transboundary Air Pollution signed the Declaration to Phase Out Added Lead in Petrol confirming their willingness to phase out leaded gasoline by 2005, thereby going further than the Protocol which sets the ultimate phase out date 10 years after the protocol enters into force, that is by 2010/2011. The signatories of the Declaration are:

• CIS: Moldova, Ukraine

• CEE: Bulgaria, Croatia, Czech Republic, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia

• EU and other Western countries: Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Liechtenstein, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, USA.

fleets increase and excess reforming capacity diminishes.

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Emissions Intensities

Statistical analyses have been used to determine whether the fall in total emissions of key air pollutants is simply the consequence of lower levels of GDP, industrial production, and energy use or whether real improvements have taken place in emissions intensities, i.e., in emissions per unit of output and energy use. (The analysis was not performed for CO₂ emissions which are largely a function of energy use; or for lead emissions, which are influenced by the complex factors discussed above.) 7

The key results of this analysis are illustrated in Figures 11 and 12, which show changes in emissions intensities normalized to an index value of 100 for 1991. For the advanced reform countries, there has been a clear and sustained reduction in emissions intensities for PM, SO₂ , and NO_x over the period as a whole. The improvement up to 1992 was small and could have been due to random factors, but since then there has been an overall fall of 20−25 percentage points or more relative to the 1991 baseline values for all three pollutants. The large decrease in emissions of volatile organic compounds (VOCs) between 1989 and 1991 may be unrelated to the transition, and progress since 1991 has been small and variable.

Figure 11.

Emissions intensities for air pollutants in advanced reform countries, 1989−95

Figure 12.

Emissions intensities for air pollutants in slower−reforming countries, 1989−95

Emissions Intensities 24

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For the slower−reforming countries, there is little evidence of any significant improvement in emissions intensities over the period; they have fluctuated within a range of 10 percent on either side of the 1991 baseline values. (It is possible that emissions intensities for PM have started to fall in a sustained manner, but more recent observations are needed before the improvement can be regarded as convincing.)

Overall, this analysis suggests that the changes associated with economic reform and the transition have produced real environmental benefits in the advanced reform countries which go significantly beyond the reductions in emissions resulting from declines in income and output. Similar gains are not observable in the slower−reforming countries. This may simply be a matter of timing; output and energy use were still falling in 1995, and additional improvements in emissions intensities may have been postponed until the economies started to recover.

Nevertheless, the limited progress in economic reform appears to be the explanation for the failure of slower reformers to significantly improve emissions intensities.

Ambient Air Quality in Urban Areas

Although the relationship between aggregate emissions and air quality in specific cities is not a simple one, large reductions in emissions of key air pollutants should mean that urban air quality has improved in the transition economies. Because emissions from large stationary sources such as power plants and large industries are farther away from urban populations and disperse over a wide geographic area, their relative impact on local air quality and human health is smaller than the impact of emissions from small sources such as households, small

commercial boilers, and vehicles. Therefore, if the reduction of emissions has extended to small sources, as the analysis of the pattern of coal consumption suggests, this should translate into better urban air quality.

Figure 13 presents the results of an analysis of air quality trends for a sample of 44 urban areas in Western Europe, Central and Eastern Europe, and the former Soviet Union covering the period 1989−96. Since many factors influence the nature and extent of air pollution in different cities, the analysis focused on estimating average time trends for the improvement or worsening of air quality indicators in urban areas in different groups of countries. For example, the average improvement of 4.3 percent per year in

Figure 13.

Trends in urban air quality by country group, 1989−96

PM in Western Europe means that ambient concentrations in the typical Western European city in the sample were falling by this amount each year over the eight years. 8 The outcomes for individual cities show a fair degree of dispersion, but there are statistically significant differences between the time trends for the three groups of countries.

Ambient Air Quality in Urban Areas 25

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The advanced reform countries experienced a significantly greater average improvement in ambient

concentrations of PM than did the other two country groups. Despite the substantial reduction in dust emissions in the slowerưreforming countries, their proportional improvement in average concentration of PM was no better than that achieved in Western Europe, although their much higher initial levels meant a greater absolute decline in concentrations. For SO₂ , the improvement in Western Europe outstripped that in both the advanced reform and slowerưreforming countries, though the latter did better than the former. Finally, the improvements in ambient concentration of NOx are almost the same in Western Europe and in the advanced reform countries, whereas there was a clear deterioration in the slowerưreforming countries, particularly those in the CEE. This worsening seems to reflect the rapid growth in the number and use of motor vehicles without any improvement in their average emissions per kilometer. Furthermore, nitrogen oxides are products of all fuel combustion, and fuel switching therefore had less effect on NO_x emissions than on PM and SO₂ emissions.

Air Pollution Trends in Hot Spots

Although national trends are important, the extent to which environmental conditions have improved in the most polluted regions should be given equal weight in assessing the environmental benefits from the transition. For this reason data have been collected on five hot spots in the region: the Baltic countries (primarily with respect to water pollution), the DonetskưKharkov region in Ukraine, the Maritsa Basin in Bulgaria, the Upper Silesia region in Poland, and the VolgaưUrals region in the Russian Federation. The data cover both emissions of key pollutants and indicators of environmental quality from 1990 to 1997. Figure 14 shows the average annual reduction in total emissions of dust and SO₂ for the four hot spots

Figure 14.

Trends in emissions of air pollutants in hot spots, 1990ư96

with major air pollution problems. 9 The comparison suggests that emissions of both pollutants have fallen much less rapidly in these hot spots than in the relevant reform group as a whole. The shortfall is particularly marked for the Maritsa Basin and the DonetskưKharkov region. Only in the case of dust emissions in Upper Silesia does the average rate of reduction come close to the general average for advanced reform countries.

When improvements in urban air quality in hot spots (shown in Figure 15), are compared with the general trends shown in Figure 13, the results are somewhat more reassuring. The average improvement in PM concentrations for the Baltics and Upper Silesia (6.5 percent and 7.3 percent per year, respectively) are very similar to the average improvements (6.7 percent per year) in urban areas in the advanced

Air Pollution Trends in Hot Spots 26

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Figure 15.

Trends in urban air quality in hot spots, 1990−96

Box 4. Industrial production and air quality trends in two hot spots

Hot spots in many countries show similarities because of past economic development paths. For example, Upper Silesia in Poland and Donetsk−Kharkov in the industrial belt of Ukraine are both centers of heavy industry with complex engineering infrastructure.

Industrial production and, in particular, coal−based power and heat generation have been identified as the major sources of air pollution in both regions. As a result, airborne particulates are a major air pollution problem in both areas.

During the transition, marked differences between Upper Silesia and Donetsk−Kharkov have developed. In both areas, industrial output has declined, but in Upper Silesia the decline did not exceed 20 percent, and by 1997 industrial production had surpassed its 1990 level by 32 percent. In Donetsk−Kharkov industrial output in 1996 was less than 50 percent of the 1990 level.

Ambient concentrations of PM increased temporarily in both areas during the early 1990s even though industrial output declined. However, the increase was reversed much sooner in Upper Silesia than in Donetsk−Kharkov. Whereas in Upper Silesia ambient concentrations have declined steadily since 1991 despite increasing industrial production, in Donetsk−Kharkov the relative improvement in ambient concentrations has been smaller, as particulate emissions per unit of output have increased

continuously. The underlying reasons for this phenomenon can be traced to differences in the overall economic conditions of the two countries, in economic restructuring, and in environmental protection measures.

In Upper Silesia air quality was improved through a switch to cleaner fuels, investment in new capital stock, and air pollution abatement measures. No improvements have taken place in the Ukraine, where, because of serious macroeconomic difficulties, priority was given to maintaining the production capabilities of existing capital stock

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and technologies and even planned investments in pollution abatement were delayed or abandoned. Of the 47 pollution abatement facilities planned for 1994, only 20 became operational, and their capacity reached only 15 percent of the target. The share of outưofưorder equipment exceeded 20 percent in 1994 and has continued to grow due to shortages in operation and maintenance (O&M) funds, personnel, and materials. Energy intensities remained high or rose. The result has been an actual increase in emissions per unit of output, especially in power and heat generation. Deterioration in air pollution control has also been linked with inadequate environmental management practices at all levels. Environmental regulations have often been violated, with no response by the regulatory bodies.

reform countries. The average improvements in ambient concentrations of PM in the Maritsa Basin and the DonetskưKharkov region outstrip the overall average for the slowerưreforming countries. However, the relative improvement in the KharkovưDonetsk region is considerably smaller than in Upper Silesia (see Box 4 for a more detailed discussion). A cause of concern is the deterioration of urban air quality in Russia's VolgaưUrals region.

The pattern for SO2 is less encouraging than that for PM. Only in the DonetskưKharkov region did the rate of improvement outstrip the average rates for the relevant reform group. 10

Overall, these results suggest that progress toward translating overall improvements in emissions and urban air quality into better environmental quality for those living in the most polluted regions has been relatively slow.

This is clearly one of the major challenges facing environmental policy in the slowerưreforming countries, especially in the NIS, and it highlights the difficulty of achieving sustained improvements in environmental performance in the absence of effective economic reform. Hot spots, by their very nature, contain large

concentrations of inefficient and polluting heavy industrial plants. Throughout the region, and even in advanced reform countries, progress in privatizing and restructuring large heavy industries has been slower than in other sectors of the economy. Without budgetary discipline and measures to enforce better management, these plants tend to continue business as usual, although at a lower level of output, so that there is little or no improvement in environmental performance in terms of pollution intensity of output It is unrealistic to expect significant progress in the hot spots in the slowerưreforming countries until the painful decisions involved in restructuring or closing plants have been taken.

These results suggest that, to achieve the highest returns in terms of improving human health and welfare, priority should be given to:

• Improve access to piped rural water supply and the coverage of urban sanitation in Albania and the NIS Southeast countries, especially in Tajikistan, Turkmenistan, and Uzbekistan