Creating Market Economy in Eastern Europe

БОЛЬШАЯ ЛЕНИНГРАДСКАЯ БИБЛИОТЕКА - РЕФЕРАТЫ - Creating Market Economy in Eastern Europe

Creating Market Economy in Eastern Europe

Annual Paper

of “World Economies”

“Creating Market Economy in Eastern Europe”

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The Summary

Introduction

1. Meaning of market Economy and Tasks of the Transitions.

2. The Emergence of Market Economy in European countries.

1. . The Transition to a Market Economy.

2. Poland and Hungary as the best example of transition in the East

Europe.

2. Moldova’s way to an open economy.

Conclusion.

Introduction

This paper is oriented toward the problems of transition and creating

in countries of Eastern Europe, namely Poland, Hungary, all of which are

attempting to make the transition under a democratic, parliamentary form of

government.

The last new years have witnessed truly extraordinary events in the

formally communist societies. Under newly established conditions of free

speech and freedom of organization, communist principles of political and

economic control have been widely repudiated, and communist governments

have been swept aside, replaced by governments committed to democratic

principles and a market economy. While in some countries and parts of

countries former communist have not been decisively dislodged, in almost

all cases communism has lost whatever remaining legitimacy it possessed,

and it most of these societies the crucial economic issue has suddenly

changed from reforming the socialist planning system by the introduction of

market-like elements to moving to a market-economy with private ownership

of most of society's assets.

There are several reasons why the task of designing this transition is

fascinating, especially to economists.

First, the problem in new: no country prior to 1989 had ever abandoned

the communist political and economic system.

Second, the experience to date indicates that countries attempting

transition face a number of common problems and difficulties. While there

are important differences in the inherited situations and the choices made

by governments of these countries, the similarities in the problems they

face and the difficulties they are encountering suggest that there is logic

to the transition process.

Third, the absence of any close historical parallels and the limited

experience economics in transition offer an opportunity and a challenge for

development of normative transition scenarios. This turn out, however to be

extraordinarily difficult to construct.

Finally, the problems are not waiting for annalists' solutions;

decisions currently being made may lead to an evolution with irreversible

consequences.

1. Meaning of Market Economy and the Tasks of the Transitions.

That economic system which brings together natural resources, labour

supply and technology and which is principally privately owned and were

government has to some extent always been involved in regulating and

guiding the economy, has been referred to as "Market Economy". Yet, despite

this history of government intervention, individuals in that country have

always been able to choose for whom they will work and what they will buy.

Now 3 groups make decisions and it is their dynamic interaction that

makes the economy operate. Consumers, producers and government make

economic decisions on a daily basis, the primary force being between

producers and consumers; hence, the market economy designation.

Consumers look for the best values for what they spend while

producers seek the best price and profit from what they have to sell.

Government, at state and local levels, seeks to promote the public

safety, provides social safety-net, ensures fair competition and also

provides a range of services believed to be better performed by public

rather include education, health service, the postal service road and

railway system, social statistical reporting and, of course, national

defense.

In this market economy system, economic forces are unfettered, supply

and demands build up the price of goods and services. Entrepreneurs are

free to develop their business unless they can provide goods or services of

a quality and price to complete with others; they are driven from the

market.

By and large, there are three kinds of business:

1) those started and managed personally by single entrepreneurs;

2) the partnership where two or more people share the risks and rewards

of a business;

3) the corporation, there stock holders as owners can by or sell their

shares at any time on the open market; this latter structure permits

the amassing of large sums of money by combining investment, making

possible large-scale enterprise.

Innovations in economic theory in the last two decades undoubtedly

affect the way economists look at the transition problem and have probably

made them more pessimistic about the ease with which it can be

accomplished. Developments in transaction cost economics, the economics of

information, the new institutional economics, and evolutionary approaches

to economics have sensitized economists to the vital role that institutions

play in economic process. One way of thinking about a successful market

economy is that it is a set of convergent expectations in the population

about how other people will behave; these expectations support an extremely

elaborate division of labour or a high degree of specialization among

individuals, organizations, and geographic areas.

In recent decades many economists have returned to the Schumpeterian

view that the advantage of the market economy (relative to its

alternatives) lies more in its facilitation of innovative activity than in

its allocative efficiency.

The system of central planning is surely deficient in both respects

but it is shortcomings seem to be much greater in the area of innovation

than in allocative efficiency.

Another development in economics that has reduced the affractiveness

of the large conception of market socialism is the increased attention paid

to the motivation of government officials, both legislators and

bureaucrats.

In the 1950's and 1960's, much of economic analysis was focused on

market failures and government action to remedy these failures, under the

implicit assumption that government officials would follow the rules laid

down by the authorities. The analysis of the logic of collective action and

the formation of interest groups the theory of rent-seeking behavior, and

the study of the evolution of cooperation and norms have emphasized that

government failure as well as market failure must be taken into

consideration in designing institutions.

A vivid analogy stated by Vladimir Benachek of Charles University is

that the socialist economics are at the top of a small hill (the planned

economy), and they want to get to the top of a larger hill (the market

economy). But in between the two hills is a valley, which may be both wide

and deep. The analogy illustrates the point that the centrally planned

economics did have a coherent economic system (i.e. they were at the top of

their hill). One might add that the smaller hill was being eroded by the

strengthening of special interest groups and was perhaps, settling due to

the seismic rumblings that shattered the communist authority. The band of

travelers must settle their differences, agree on a route, and avoid the

pitfalls and chasms along the way.

Perhaps economic analysis can facilitate the journey by designing a

bridge between the two hills. Given the absence of close historical

parallels and the severe limitations of economic models of society it is

clearly beyond the capacity of social engineers to draw up very precise

plans for the bridge.

The Tasks of the Transitions

The list of activities which governments which governments must

undertake in countries attempting the transition to a market economy is

truly staggering. The list given here is designed to convey something of

the enormity and complexity of the job. First, there is a group of

activities related to creating a new set of rules:

1. Setting up the legal infrastructure for the private sector:

Commercial and contract low, antitrust and labour low, environmental

and health regulations; rules regarding foreign partnerships and wholly

foreign-owned companies; courts to settle disputes and enforce the laws.

2. Devising a system of taxation of the new private sector:

Defining accounting rules for taxation purposes, organizing an

Internal Revenue Service to collect taxes from the private sector.

3. Devising the rules for the new financial sector:

Defining accounting rules for reporting business results to banks and

investors; setting up a system of bank regulation.

4. Determining ownership rights to existing real property:

Devising laws relating to the transfer of property, and laws affecting

landlord tenant relations; resolving the vexatious issue of restitution of

property confiscated by communist governments.

5. Foreign exchange:

a) setting the rules under which private firms and individuals may esquire

and sell foreign exchange and foreign goods;

b) setting the rules in the same area for the not-yet-privatized

enterprises.

Next there are some tasks related to managing the:

6. Reforming prices:

Enterprises that have been privatized will presumably be largely free

to set their own prices, but early on in the process, the demands of the

government budget will require raising prices on many consumer goods that

have been provided at prices for below cost.

7. Creating a safety net:

Setting up an emergency unemployment compensation scheme; targeting

aid in kind or in cash to those threatened with severe hard ship by the

reforms.

8. Stabilizing the macroeconomic:

Managing the government budget to avoid an excessive fiscal deficit

and managing the total credit provided by the banking system.

Finally there are tasks related to privatization:

9. Small-scale privatization:

Releasing to the private sector trucks and buses, retail shops,

restaurants, repair shops, warehouses, and other building space for

economic activities; establishing the private right to purchase services

from railroads, ports, and other enterprises which may remain in the public

sector.

10. Large-scale privatization:

Transferring medium and large-scale enterprises to the private sector;

managing the enterprises that have not yet been privatized.

An abstract Model of the Transition consist of three main phases:

Phase 1: The cabinet-level negative phase

In this phase members of the central government interact with

nationally representative interest groups. The tasks are organized into two

categories: they will determine the general institutional structure of

society and set guidelines that will be used in phase 2 to assign each

enterprise to one of many alternative "transition regimes".

Phase 2: The assigned phase

In this phase state-owned enterprises are matched with transition

regimes. One can assume that each state-owned enterprise is completely

described by some vector of attributes. These attributes specify such

diverse aspects of the enterprise as:

a) the nature of the products produced by the enterprise, a description

of its plant and equipment, and technology it utilized;

b) a description of its financial states;

c) the place of the enterprise within its industry, including its

market share and the nature of its competition;

d) some indication of the risk profile of the firm;

e) the distribution of information within the enterprise;

f) the nature of "measurement errors" in monitoring the performance of

the enterprise;

g) the relationship between the enterprise and the state bureaucracy;

h) the "distance" between the enterprise and founding ministry;

i) any potential synergies between the enterprise and some prospective

foreign investor.

Phase 3: The enterprise-level negotiation phase

In this phase participants at the participants at the level of each

enterprise play an MB game (multilateral bargaining). For each enterprise

the structural parameters of the game are included in the characterization

of the transition regime to which the enterprise is assigned.

2. The Emergence of Market Economy in European Countries.

2.1. The Transition to a Market Economy

1) The Successes and Failures of Central Planning.

Before considering the transition to a market economy, we must

consider the need for such a transition. Today the need is clear: socialist

and communist systems have failed to deliver (in a liberal sense) anything

like the standard of material advance so often promised.

But more recent rasy assessments of central planning abound. Even as

late as 1979 the World Bank published a long and detailed study of Romania

– the most Stalinist of the eastern block. The Bank found that from 1950 to

1975 the Romanian economy had grown faster than any other country in the

world (9,8 percent per annum). The Bank attributed this startling

performance to the fact that government, through its system of central

planning, had control of all resources. The Bank forecast a rasy future for

Romania – growing at 8,7 percent per capita to 1990. Nor was Romania an

aberration. The Bank published in that same year of 1979 a most rasy

history of, and prognostication for Yugoslavia. Studies up to 1984

continued to show that central planning, albeit somewhat modified in

places, delivered the goods.

This review is not intended to score paints, but simply to remind us

of the long addiction of economists to planning and regulation.

2) Transitions

The transition to a market economy always and at all times involves a

familiar list of policies.

First is financial stabilization reducing the budget deficit and the

monetary emissions of the central bank. This stabilization may involve many

complex policies – almost certainly a fax reform and expenditure controls,

particularly in the reduction of subsidies. There is no consensus on pegged

versus free exchange rates.

Second is deregulation, elimination a myriad of government controls

and establishing the framework for free contractual relationships. This

priority involves the recognition of property rights and the development of

a legal system suitable for a market economy. It also implies a diminished

role for the central planners as more room is provided for private

initiative and enterprise. But oddly enough it is widely recognized that

there is a need for more restraint on industry, particularly the heavy

state owned firms, to reduce pollution. Other areas of deregulation include

trade reform and currency convertibility.

Third is the reform and privatization of state- owned concerns to this

list should be added the reduction in monopoly power not only of industry

but also of trade unions, and in particular the reform of labour laws. The

reform of the banking system and the development of commercial rather than

planning criteria in banking it also of the utmost important.

3) The Political Economy of Transition in Eastern Europe:

Packing Enterprises for Privatization.

An abstract model of the transition from a centralized command economy

to a market economy focusing on privatization is a novel orientation for

this chapter. In much of the literature on privatization in central and

Eastern Europe, either a case is argued for a particular transition

proposal or specific aspects of the privatization problem are isolated and

considered in detail.

The model focuses on the way in which government policies and

enterprise-level decisions are made and relatively less on the specific

content of these policies and decisions.

The conceptual model has been designed with five basic premises in

mind: multilateral bargaining, political economy, heterogeneity,

decentralization, and pluralism.

4) Multilateral bargaining

In a world in which economic rights are ill designed, a bargaining

problem naturally arises. Throughout Central and Eastern Europe, this

problem can be conceptualized as a multifaceted conflict between multiple

interests representing workers, management, claimants to property rights

based prior ownership, foreign investors, representatives of different

group in the distribution chain, etc.

It is useful to distinguish two different kinds of bargaining

problems. There are issues that must be negotiated at the level of central

government: for example, what will be the nature the regulatory and legal

infrastructure within which these privatized enterprises will operate?

Other issues concern the disposition of individual state-owned enterprises

and must be negotiated on a case-by-case basis. In particular what will be

the precise nature of each corporate entity that is being packaged for sale

to private buyers? Who will control it? How will it be structured? What

kind of compensation schemes will be in place for management and workers?

What special provisions will be in place that affect the relationship

between the privatized entity and other firms, including established and

new competitors, firms that are up and down stream in the distribution

chain, etc.? In the discussion that follows, the focus will be on

bargaining problems of the latter kind. One presumes that, because of the

complexity and diversity of the issues during the transition, the state is

not in a position to resolve them by fiat rather, over the transition, the

state is presumed to be one negotiator among many.

Bargaining problems of this kind can be resolved in a variety of ways.

At one extreme, an explicit institutional structure may be established by

the state to facilitate an orderly negotiation of the issues. This

institution would specify:

a) the interests that should be represented in the bargaining process;

b) the space of issues over which these interests can negotiate;

c) what degree of consensus is sufficient to conclude negotiations;

d) who will represent "the state" the founding ministry are some

agency established specially to deal with privatization;

e) what will happen if negotiations break down?

At the other extreme the state may provide no procedural guidelines

whatever as to how the issues should be resolved in this procedural vacuum,

the economic rights in question may simply be expropriated by whichever

party - typically the current management - is strategically located to do

so.

Relative to the general trend that appears to be emerging in Central

and Eastern Europe, there should be made opportunities for decentralized

negotiation.

Our process-oriented perspective does suggest an indirect, "hand off"

way to exercise some control over this phase of the process, the government

can introduce some checks and balances into the negotiations. For example,

of the three "primary" parties at the bargaining table-management,

employees of the enterprise, and the state agency responsible for

privatization - the first two parties have every incentive to design

privatization plans that inhibit competitive pressures, while the third

will inevitably be more concerned this effecting a successful sale of the

enterprise than with issues such as the competitiveness of the resulting

market structure. From the standpoint of the public interest then the

outcome of multilateral bargaining is bound to be sub-optimal, provided

that participation in the process is restricted to the three primary

parties. Moreover, the directions in which these outcomes will deviate from

the optimal are more or less predictable.

The Multilateral Bargaining model provides a useful analytical tool

for investigating the effectiveness of this approach to policy making.

In other contexts, the multilateral Bargaining model has been used

descriptively to explain how during the process of multilateral

negotiation, coalitions are formed, deals are struck, and compromises are

reached.

5) Political economy.

A second basic premise is that any policy recommendations must be

both economically and politically consistent. This consistency requires a

specification of the relationship between short-term economic developments

and longer-term political ramifications. Obviously, economic policy

objectives cannot be pursued in isolation, since the prevailing political

configuration will constrain the set of options available to planners of

the transition process. On the other hand, economic post-privatization

economy develops, new interests will acquire economic power and new

institutions will emerge to strengthen the power of groups that wish to

defend these institutions. The dynamic interaction between these economic

and political facets of massive privatization programs must be taken into

account. Indeed, one can expect that models, which ignore political

economic feedback effects, will have a natural tendency to overestimate the

prospects for a successful transition.

The following example illustrates the kind of political-economic

interaction that could adversely affect the reform process. Policy makers

in Central and Eastern Europe appear to be overly complacent in their

reliance of foreign competition as the main disciplinary device that will

force monopolists to operate efficiently. Indeed, Polish officials cite

their country’s liberal tradition in the area of trade policy when

questioned about the viability of this approach to antimonopoly policy. Our

dynamic political-economic perspective leads to skepticism about this heavy

dependence on competition from abroad.

If a seems very likely, the post-privatization industrial structure

turns out to be highly over-concentrated and inefficient, then the main

effect of threatening foreign competition will be to unleash a powerful

confluence of political forces in favor of protectionism. Owners of the

domestic enterprises will lobby to defend their rents, managers will lobby

to defend privileges, and workers will lobby to defend their jobs. Because

the problem of unemployment never really arose under communism, the potent

tension between introducing free trade and maintaining employment levels

never became apparent.

2.2. Poland and Hungary as the best example of transition in the East

Europe

Economic Reform in Eastern Europe: The Background

The background of economic reform in Eastern Europe is not unlike that

in the Soviet Union, even though, as I have emphasized, the setting is

rather different. The brief political thaw following the death of Stalin in

the early 1950s did permit a freer discussion of ideas, which, along with

growing problems of economic performance, led to limited attempts to

develop and implement economic reform. Initially, these changes were modest

in scope, and they typically followed the Soviet reform pattern: Try to

improve decision making while preserving socialist objectives and the

essence of the planning system. This was the focus of the New Economic

System in the GDR and of the New Economic Mechanism introduced in Hungary

in 1968. The potential for genuine economic reform was certainly limited by

Soviet influence. Indeed in some cases (such as Czechoslovakia in 1968),

reform was abruptly forestalled by Soviet intervention. In other cases,

such as Hungary, reform attempts dating from the late 1960s were sustained

on a limited basis, to become the background for more serious reform in the

present era. There were, then, numerous attempts at reform in Eastern

Europe. What were the major forces promoting these efforts?

First, as was the case in the Soviet Union, rates of economic growth

in Eastern Europe have undergone a long-term secular decline. The magnitude

of this decline (see Table 1) has varied from case to case, but overall it

has been pervasive. Moreover, these countries had taken pride in being high-

growth economies, even if the costs, such as little growth of consumer well-

being, were also high. At the same time, growth in productivity slackened,

especially in the late 1970s and 1980s. And inflation quickened, though it

was most serious in Poland and Yugoslavia. Repressed inflation, though

difficult to measure, grew in importance in the 1980s.

Second, East European countries relied heavily on foreign trade as a

means of stimulating economic growth in the 1970s. Their strategy was to

promote exports in Western markets so that the imports required both to

stimulate technological change in industry and to enhance consumer well-

being could be obtained without the growth of hard-currency debt.

Unfortunately, this strategy was not successful. The energy crisis led to a

significant slackening of Western markets at the very time when East

European nations were becoming more aggressive in these markets. East

European imports were sustained, but largely by means of building a

substantial hard-currency debt. The magnitude of debt repayment

subsequently led to considerable internal belt-tightening for these

countries in the 1980s — precisely the opposite of what had been intended.

Third, one could argue that in Eastern Europe, the possibilities for

economic growth through extensive means had initially been less promising

than in the Soviet case and had been exhausted more quickly. In light of

the level of economic development in Eastern Europe compared to that in the

Soviet Union, it is not surprising that the imperative for reform was

strong and that developments of the Gorbachev era quickly spilled over into

Eastern Europe. In the absence of Soviet backing, interest in the

administrative command model faded fast.

Table 1. Economic Growth and Performance in Eastern Europe:

The Background to Reform

| |1961-70 |1971-80 |1981-85 |1985 |1986 |

|Eastern |3.4 |2.4 |1.0 |.2 |2.2 |

|Europe | | | | | |

|Bulgaria|5.0 |2.3 |.1 |-3.2 |4.7 |

|Czechosl|2.4 |2.3 |1.0 |.4 |1.9 |

|ovakia | | | | | |

|East |3.2 |3.5 |1.7 |3.3 |1.6 |

|Germany | | | | | |

|Hungary |3.1 |2.5 |.6 |-2.3 |2.4 |

|Poland |3.3 |3.0 |1.0 |.2 |2.1 |

|Romania |4.2 |3.5 |-.6 |-1.4 |3.1 |

East European Reform Programs: Similarities and Differences

In this chapter we pay special attention to Poland and Hungary. We do

so because these countries are both examples of aggressive reform but have

employed different strategies. However, before we consider these cases in

greater detail, it is useful to summarize the East European reform

experience, noting important similarities and differences among the various

cases. To do so will entail some repetition of basic themes.

First, economic reform in Eastern Europe (at least in Poland, Hungary,

and Czechoslovakia) is generally described as a transition in that these

countries seek to replace the planned economy with a market economy rather

than attempting merely to modify the former.

Second, transition programs have varied in speed and intensity. Some

countries have pursued reform on a "gradual" basis, whereas others, like

Poland, have pursued what is often termed a "big bang," or rapid, approach

to reform. However, we must remember that even in those countries not

pursuing a "big bang" or "shock therapy" approach, the process of

transition in Eastern Europe has been relatively rapid, especially when

compared to reforms of the past - and notably so when compared to the

recent Soviet record. It is important, therefore, to be aware of the basic

issues associated with transition and of the extent to which the attempted

speed of transition alters the overall reform experience.

Third, although it is possible to examine and understand the basic

elements of economic reform and even of transition from one system to

another, we really do not have a general theory of change in economic

systems. In some cases — for example, during such a period of rapid change

as the 1990s — it is difficult even to develop a way to classify the issues

involved in transition.

Fourth, important differences exist from one country to another. Our

view of the socialist transition process is heavily influenced by our image

of the best-known and most advanced reforms, such as those of Poland,

Hungary, and Czechoslovakia. We know much less about, and tend to pay less

attention to developments where reforms are proceeding at a slower pace, as

in Romania and Bulgaria. Figure 1 offers a simple, stylized view of

contemporary political and economic reform (transition) in Eastern Europe.

Figure 1. Reform in Eastern Europe

POLAND: FROM PLAN TO MARKET VIA SHOCK THERAPY

Until Solidarity won the parliamentary elections in Poland in the

summer of 1989, the Polish economy had been, since the end of World War II,

a rather typical planned socialist economic system. State ownership

predominated, and though economic reform was attempted in varying degrees

at different times, little real systemic change had taken place. Moreover,

as Table 1 shows, the rate of economic growth continued to decline, and the

period saw recurring shortages, increasing inflation, and an understandably

declining work ethic.

Beginning in 1990, Poland took decisive steps toward a market economy.

This "shock therapy" approach was to be sudden, and in this it differed

significantly from the gradualist approach being discussed in other

socialist systems. In addition to treeing prices, Poland implemented

monetary controls, the zloty was made convertible into hard currencies, and

steps were taken to control wage increases.

As we shall see, the "shock therapy" approach has not been without

critics. Moreover, although the Polish case quickly attracted the interest

of those who study the problems of socialist transition, it was viewed as

unique. Thus it was argued that. for a variety of reasons that were

discussed earlier, reform was much more likely to succeed in Poland than in

a case like the Soviet Union. But before we examine the Polish reform

experience in greater detail, we must review what brought the Polish

economy to the reform phase and how, at that point, it might be different

from other socialist countries.

I begin our discussion of Poland with a brief examination of the

setting. Then I discuss the Polish command system, considering the extent

to which this system led to distortions in the Polish economic structure.

Finally, I turn to the issue of transition and examine the mechanisms

utilized and the results achieved thus far.

1) Poland: The Setting

By European standards, Poland is a relatively large country. With a

land area of just over 300,000 square kilometers, it is just over half the

size of France. Moreover, with a population that approached 38 million in

1990, Poland is some 68 percent of the size of France in terms of

population.

Poland is frequently viewed as having a homogeneous society, a factor

that facilitates economic reform. Although social homogeneity is difficult

to measure and may well be overstated in the Polish case and in other cases

(for example, there are regional differentials, urban-rural differentials,

and the like), the basic statistical evidence is strong. In terms of

religion, 95 percent of the Polish population is Roman Catholic. From a

stannic standpoint, 98.7 percent of the population is Polish, and only a

few minority groups occur.

Urbanization and industrialization have changed the nature of Polish life

and customs, but the church, family, and folk ties that have sustained

Poland for a long time remain strong. Thus, although Poland must deal with

problems of modernization, it also has valued traditions and a clear

identity. These qualities make implementing change more manageable here

than in many other countries.

In terms of natural resources, Poland is a country of considerable regional

diversity, though major portions of the land area are not especially

fertile.

Poland's main energy resource is coal; basic minerals and some deposits of

oil and natural gas also exist. Both basic data and methods of computing

economic aggregates of socialist systems are currently under scrutiny. New

evidence that will make it possible to do different kinds of computations

may well lead to important adjustments. With these reservations in mind,

however, we note that Poland was reported to have a per capita gross

national product of approximately $4500 measured in 1989 U.S. dollars. This

figure places it between the high-income countries of the region (Hungary

and Czechoslovakia) and the low-income countries (Bulgaria, Romania,

Yugoslavia) and at one-quarter that of the United States. Prior to the

onset of major economic reform, the bulk of Polish industry was state-owned

and planned. Agriculture (representing roughly one-fifth of total Polish

output) was a mixed system wherein the private sector produced about three-

quarters of the total agricultural product. Foreign trade turnover — that

is, exports plus imports — represents roughly one-third of Polish product,

again using U.S. dollar measures.

2) Poland: The Command Economy

The organizational arrangements of the Polish command economy were

established immediately after World War II and closely resembled those

prevailing in the Soviet Union. There was widespread nationalization of

property, central planning mechanisms were established, and agriculture was

socialized. In addition to organizational arrangements, Polish economic

policies of the era, such as those on investment, sectoral development, and

the like, closely mirrored the Soviet model.

Although Poland attempted modification of the command system as early

as 1956 when collectivization was abandoned, little actually changed. Over

time, private agriculture was neglected by the state, and continuing

political protests, especially in the early 1970s, signaled both political

and economic difficulties.

The 1970s was a difficult decade for many countries, especially those

that rely on imported oil. The Polish strategy in the 1970s and later was

to stimulate the domestic economy through the importation of foreign

technology. This was not an unreasonable strategy in theory, but Western

economies were themselves in the midst of the energy crisis and the

recession it caused. Poland's effort to expand exports failed, hard-

currency debt accumulated, and the projected impact of Western technology

on the Polish economy was minimal. As the 1970s came to an end, it was

evident that domestic retrenchment would be essential — a difficult path in

light of the continuing unrest among Polish workers. The 1980s began with

roughly three years of martial law and an attempt to achieve economic

stabilization.

After half-hearted economic reforms in the early 1980s, the rise of

Solidarity (which had been outlawed in 1982) proved that major systemic and

structural reform was necessary. Even so, and despite the fact that Polish

economic performance was deteriorating badly, serious economic reform did

not begin until the late 1980s.

3) The Polish Transition: The "Big Bang" in Practice

The Polish transition from plan to market has been watched closely by

a variety of interested observers. Although many of the policy and systemic

changes introduced in Poland are familiar hallmarks of the general reform

scene, the speed of implementation in the Polish case is unique.

There had been attempts to decentralize decision making in large state-

owned Polish enterprises in the 1980s, but these reforms failed to change

outcomes (a possible exception is their contribution to the wage explosion

that took place toward the end of the decade). Moreover, on the eve of

reform in Poland (the reform program began officially on January 1, 1990),

macroeco-nomic conditions there were in a state of severe disequilibrium.

Although the exact nature of monetary overhang in Poland (as elsewhere) has

been the subject of debate, there was a significant budget deficit, wage

increases were out of control, and hyperinflation had resulted. Poland's

hard-currency debt position was better than that of Hungary, but the debt

that had been accumulated did little to stimulate the Polish economy, the

zioty was overvalued, and no debt relief from external sources was in

sight.

In the fall of 1989, most price controls were lifted (on both producer

and consumer goods), public spending was reduced, and the zioty was

devalued. In the second stage of major reform, begun in 1990, the budget

deficit was sharply cut, largely through a reduction of subsidies to state

enterprises. A positive real rate of interest was to be implemented, and

the market was to be used to signal changes in the value of the zloty. The

latter was a critical measure, because foreign trade and the impact of this

trade on the Polish industrial structure was to be a key component of the

overall reform strategy. In January of 1990, the government set the

exchange rate of the zloty at 9500 to the dollar (this represented a

devaluation from 1989), a rate roughly approximating its value on the black

market, and it established convertibility of the zloty for international

trade. Many trade restrictions were eliminated, and internal exchanges were

set up to handle the buying and selling of hard currencies. Although these

changes resulted in domestic inflation, the initial increases proved to be

short-term and the exchange rate of the zloty has proved to be realistic.

Finally, wage increases were to be controlled partly through wage

indexation and partly through a new tax on wage increases that exceeded

established guidelines.

Privatization is a major element of the Polish strategy of transition.

In 1990 the Polish government passed a law creating a Ministry of Ownership

Change, a mechanism to supervise the process of privatization.

Privatization has proceeded rapidly, though it has been achieved mainly for

small enterprises in the trade and service sectors. Industrial output in

the private sector grew by 8.5 percent in 1990 and is reported to represent

roughly 17 percent of total Polish industrial output

Though privatization has been very successful for small-scale enterprises,

the picture for large state enterprises is quite different. For reasons we

noted earlier, privatization of these enterprises has proceeded very

slowly. In addition, the economic position of these enterprises worsened as

the state took decisive measures to introduce a hard-budget constraint. In

addition to price changes and wage limitations, subsidies have been ended

and protection from foreign competition has been sharply reduced. This new

setting has encouraged enterprise managers to reduce costs by restricting

unnecessary output and reducing the labor force. However, the strong

commitment to rapid privatization was reinforced in June of 1991, when it

was announced that a major portion of state industry would be privatized

through creation of stock funds, with the population receiving vouchers.

Beyond these changes in the state sector, new guidelines have been

introduced to monitor enterprise performance. Furthermore, a new Industrial

Restructuring Agency will consider how remaining state enterprises should

be handled, to what extent privatization is possible, and what

restructuring should take place for those enterprises that are not viable

in the new setting. These new arrangements are designed to ensure a rapid

transformation of the Polish industrial structure, to make it similar to

and competitive with market economic systems, and to achieve this result

quickly and as openly as possible.

Note that these comprehensive reforms in Poland cover all the critical

areas discussed in Chapter 4 and earlier in this chapter. Moreover,

beginning from very precarious economic circumstance in 1989, these changes

were introduced simultaneously and rapidly. We will now do our best to

assess the early results.

4) The Polish Economy in the 1990s

It is clear that economic reform in Poland has been radical and has

moved sharply and swiftly away from the plan toward the market. In addition

to the expanded influence of market mechanisms, decision making has been

decentralized, private property introduced, and incentive arrangements

changed. By most standards, the initial results have been encouraging.

First, stabilization measures cut the rate of inflation sharply from a

reported 40-50 percent per month at the end of 1989 to roughly 4-5 percent

per month in 1990. At the same time output fell, though supplies of

consumer goods in stores increased. Employment in industry declined by 20

percent during 1989 and 1990, although it is reported that only a

relatively small portion of this reduction in the labor force was caused by

forced layoffs. The unemployment rate was reported to be 6.5 percent at the

end of 1990.

Another major positive facet of the Polish reform experience has been

the foreign trade sector. There has been a significant expansion of

exports, especially to hard-currency markets. This expansion resulted in

part from the devaluation of the zloty to market-clearing levels and in

part from the reorientation of trade away from the Soviet Union and other

East European trading partners. At the same time, as a result of

restrictive policy measures and the higher domestic cost of these imports,

import demand declined.

A third qualified success has been privatization. Although the initial

pace of privatization was rapid, this early privatization was largely that

of small-scale enterprises in the area of trade and services. Although

Polish reformers take seriously the need to pursue privatization of major

state enterprises, bringing this about will remain a critical task for the

next several years.

Can these achievements be sustained in the coming years? We discuss

this issue more generally in the next section, but the Polish case deserves

specific comment. Quite clearly, the continued success of the Polish

transition will depend on the continuing implementation of appropriate

stabilization measures. Although this may seem relatively straightforward,

it requires cohesion and commitment among policy makers and willingness

among the populace to pay the costs of the transition. Pressures for wage

increases must be resisted, and the process of privatization must proceed.

To the extent that the latter can be achieved, the contours of new market

arrangements can be defined. Finally, although uncertainty in foreign

markets remains, relief of hard-currency debt will unquestionably add a

measure of flexibility.

Another issue is the extent to which the Polish "success" (if we can

call it that) was promoted by Western assistance. In light of the Polish

leadership's commitment to rapid transition, the West has provided

considerable assistance in the form of exchange-rate stabilization funds,

debt restructuring, and government guarantees.

HUNGARY: THE NEW ECONOMIC MECHANISM AND PRIVATIZATION

Early works in comparative economic systems devoted little attention

to the Hungarian economy. Over the last twenty years, however. Western

economists have begun to pay more attention to Hungary.

As one prominent observer of Hungary and other East European systems

has noted, "The Hungarian reform experience says as much about central

planning as it does about Hungary, and therefore an understanding of that

experience is important for those interested in the prospects for reform in

all of Eastern Europe, and indeed, in the Soviet Union. In other words,

Hungary is a prototype of economic reform for the former planned socialist

economic systems of Eastern Europe, and presumably elsewhere. These

thoughts, expressed some ten years ago, remain relevant in the 1990s as

Hungary, like other socialist systems, pursues a transition to the market.

However, the background of reform in Hungary is important to a proper

analysis of contemporary problems and prospects.

Prior to 1968, Hungary applied the Soviet model of centrally planned

socialism in a typical fashion. But then, in 1968, Hungary began to

introduce by far the most radical economic reform attempted in Eastern

Europe (with the exception of Yugoslavia). In the words of one early

observer of this reform, it clearly represents the most radical postwar

change, in the economic system of any Comecon country, which has been

maintained over a period of years and gives promise of continuity.

Although the reform program in Hungary met with only partial success,

the problems that have arisen (conflicts of objectives, for example, and

difficulty in persuading participants to change their ways) are fundamental

to the reform experience of planned socialist systems.

Hungary shares many features with other Eastern and Southeastern

European countries, such as Yugoslavia. It provides a refreshing contrast

to the Soviet Union, which in some important respects is atypical. Hungary

is a small country heavily dependent on foreign trade. The Hungarian

experience with reforming foreign trade, and in particular its efforts to

become integrated into the world economy both East and West, is

prototypical. The difficulties of reforming the foreign trade mechanism arc

crucial to the Hungarian economy as well as to the economies of many other

systems of Eastern Europe.

1) Hungary: The Setting

Hungary is located in central Europe. Its land area of approximately

36,000 square miles makes it roughly the same size as the state of Indiana.

Its population of about 11 million is comparable to that of the population

of Illinois. Although Hungary is not self-sufficient in energy, it docs

have supplies of coat, oil, and a number of minerals, including important

bauxite deposits.

Although it has some rolling hills and low mountains, Hungary is

basically a flat country with good agricultural land and a favorable

climate. As in other East European countries, the period since World War II

has seen the population flow from rural to urban areas and a changing

balance of industrial and agricultural activity. Today, approximately half

the population lives in urban areas.

Hungary is not particularly prosperous. Most estimates of its gross

national product or per capita gross national product place Hungary in the

middle of the East European countries. It is generally wealthier than

Bulgaria and Yugoslavia and certainly wealthier than Albania; it ranks

behind East Germany and Czechoslovakia. Hungary's per capita income appears

to be close to that of Greece. In this sense, economic development remains

a key issue in Hungary. By the standards of Western Europe, Hungary remains

relatively poor; by the standards of the Third World, Hungary ranks among

the more affluent countries.

2) The Hungarian Economy: Prereform

The postwar reconstruction of the Hungarian economy began quite

modestly in 1945. Before the implementation of a three-year plan in 1947

(1947-1949), the main policies included stabilization of the currency,

changes in the nature of rural landholdings, and the beginnings of

nationalization. The first three-year plan was designed primarily to bring

the economy up to prewar levels of economic activity.

During this time, a planning mechanism was created and the

share of national income going to investment increased sharply. The changes

were not radical, however, and balanced development was envisioned.

The era of balanced development came to an end with the introduction

of a five-year plan in 1950. The share of national income devoted to

investment was increased substantially, and the bulk of new investment was

directed toward heavy industry. This policy was partially reversed toward

the end of the plan period, but it was reaffirmed in 1955-1956.

A number of economic trouble spots cried out for attention. There was

an observed need to improve industrial labor productivity, especially

through the development of a better incentive system to offset the

declining supply of labor from rural areas. Supply-demand imbalances were

growing increasingly severe. Waste and imbalance in the material-technical

supply system created the need for a substantially modified coordinating

mechanism among enterprises.

In addition, excess demand for investment led to substantial amounts

of unfinished new construction and to the neglect of old facilities. Some

mechanisms for the more rational allocation of capital investment had to be

found. The adoption and diffusion of technological advances were seen as

inadequate. Technological improvement was considered crucial for continued

development of the economy.

This background seems familiar: a small country, the Soviet

(Stalinist) model of industrialization, overcentralization, emphasis on

extensive growth, rigidities of the plan mechanism, incentive problems, and

the resulting difficulties. Against this background, the New Economic

Mechanism first promulgated in a party resolution in 1966 was put into,

practice in 1968. Over twenty years later, it remains one of the most

important reform programs of planned socialist systems.

3) Intent of the New Economic Mechanism

There is disagreement about the importance and effect of the Hungarian

reform program. The New Economic Mechanism (NEM) has generally been

interpreted as leaving the power to control the main lines of economic

activity (volume and direction of investment, consumption shares) with the

central authorities, while relying on the market to execute the routine

activities of the system. The NEM called for substantial decentralization

of decision-making authority and responsibility from upper-level

administrative agencies to the enterprise level. In a general way, NEM

bears a close resemblance to the Lange model. Let us consider the original

blueprint of NEM.

The objective of NEM was to combine the central manipulation of key

variables with local responsibility for the remaining decisions. The first

change was a significant reduction in the number and complexity of the

directives firms; for large state-owned firms, the traditional problems

remain. Valuation is difficult, especially in loss-making enterprises.

Moreover, it is hard to find buyers for these types of enterprises, let

alone to arbitrate the potential rights of past owners. And just as

elsewhere, privatization in Hungary is likely to become slower and more

difficult as the focus shifts to the less attractive, large enterprises.

In addition to privatization per se, Hungary has addressed the

creation of infrastructure (for example, a stock market) and new rules

designed to change the guidance of enterprises. Accounting procedures have

been refined and bankruptcy laws strengthened so that state subsidies can

be curtailed and hard budgets introduced into large state-owned

enterprises.

Hungary has also pursued a variety of stabilization measures and has

liberalized policies in the sphere of foreign trade, though to a lesser

degree and certainly more gradually than Poland. Domestic price controls

have been substantially removed, and enterprises are permitted to enter

into and benefit from foreign trade transactions. Although there are limits

on the holding of foreign exchange, the Hungarian forint is substantially

convertible for business purposes. However, the Bank of Hungary has

maintained controls such that it has access to foreign exchange earnings to

serve as repayment of the Hungarian hard-currency debt. (Hungary has a per

capita hard-currency debt roughly twice that of Poland). Hungary has

followed a tight monetary policy designed to create a balanced budget and

also to exert financial pressure on enterprises.

Hungary has very liberal laws regarding foreign investment, including

the possibility of full foreign ownership with permission. Moreover,

repatriation laws are liberal. Not surprisingly, Hungary has been

considered a leader in the quest to attract foreign investment, though the

magnitude of this investment and its overall impact on the Hungarian

economy probably remain modest.

The initial results of the transition process in Hungary have

generally been positive when judged against the sorts of expectations that

we discussed earlier. At the same time, it is proving difficult to sustain

popular support as the inevitable costs of the transition process take

their toll.

4) The Hungarian Economy in the 1990s

In spite of a tendency to compare the processes of economic reform in

Poland and Hungary, there are important differences between the two

systems, and especially in the degree to which prior reform had taken

place. Although some would argue that the New Economic Mechanism was quite

limited compared to contemporary reforms, nevertheless the reform process

has a significant history in Hungary. The differences between the Hungarian

and Polish cases are important.

Inflation has been much less serious in Hungary than in Poland. The annual

rate of inflation for 1989 has been estimated at roughly 17 percent.

Although the inflation rate increased to about 29 percent in 1990, this

performance has been viewed as positive. In addition, wage increases have

generally been controlled. Largely because of a shift away from trade with

former CMEA trading partners, the volume of Hungarian trade has declined.

At the same time, the Hungarians have experienced growth in exports to

Western markets and a generally weak domestic demand for imports — both

important developments for the overall trade balance. The good news on the

exports side, however, tends to be sector-specific. Hard-currency debt

remains a serious problem, and the movement toward a convertible currency

has been much slower than in the Polish case. Finally, the Hungarian budget

deficit has increased.

The Hungarian economy was projected to shrink by approximately 3

percent in 1991, and associated declines in consumption and investment were

anticipated. The state property agency is moving ahead with privatization.

The overall relatively slow pace of reform in Hungary may well dictate less

sharp downturns and less severe fluctuations during the periods of downturn

but, at the same time, rather slower recoveries and a longer time in which

to achieve normalization. As with Poland, the effectiveness of the

macroeconomic policies being implemented, world market conditions (such as

the price of oil), and domestic structural change through privatization

will all affect both short-term and longer-term outcomes.

EASTERN EUROPE: THE REFORM SCENE

The transition from plan to market in Eastern Europe is important, not

only for those who live with and implement the transition, but also for

those interested in the subject of comparative economic systems. For a

variety of reasons, if the transition cannot succeed in countries such as

Poland and Hungary, it is unlikely to succeed elsewhere.

Obviously, it is too early to render any definitive judgment on these

cases, let alone on the more general issues of transition. Indeed, it is

difficult to chart even basic day-to-day changes in these countries. That

having been said, let us try to assess the outcomes that have occurred so

far.

Judged in terms of our earlier discussion of economic reform and

projected outcomes in the early stages of transition from plan to market,

there is room for guarded optimism as we examine the early results in

Hungary and Poland. At the same time, there remain a number of basic forces

that will heavily influence future economic trends.

First, although initial political transformations are substantially

complete in Eastern Europe (with important exceptions such as Yugoslavia),

there are cases (such as Romania) where political instability and a lack of

cohesion (derived in part from the political legacy of the communist era)

make agreement on reform very difficult. Clearly, in these cases, the path

of reform will be slower and much more difficult than in the leading cases

that we have examined.

Table 2. Political and Economic Developments in Eastern Europe: A

Summary

|Status |Country |

|of | |

| |Poland |Hungary |Czech |Bulgaria|Romania |Albania |Yugoslav|

| | | |and | | | |ia |

| | | |Slovak | | | | |

| | | |Federal | | | | |

| | | |Republic| | | | |

|Post |Limited |Important|Limited:|Limited |None |None |Importan|

|Economi|efforts |: New |ended by| | | |t |

|c |in the |Economic |Soviet | | | |Worker: |

|Reform |1980s |Mechanism|inter | | | |manageme|

| | |since |vention | | | |nt and |

| | |1968 |1968 | | | |market |

| | | | | | | |socialis|

| | | | | | | |m |

|Per |4607 |6303 |7922 |3610 |3154 |n.a. |3409 |

|Capita | | | | | | | |

|GNP - | | | | | | | |

|1989, | | | | | | | |

|in U.S.| | | | | | | |

|S | | | | | | | |

|Percent|-8.9 |-3.6 |-3.2 |-3.6 |-11.3 |n.a. |-6.9 |

|Change | | | | | | | |

|in GNP:| | | | | | | |

|1989-90| | | | | | | |

|Officia|3387 |276 |120 |363 |186 |n.a. |761175 |

|l | | | | | | | |

|Consume| | | | | | | |

|r Price| | | | | | | |

|Index | | | | | | | |

|in | | | | | | | |

|1989, | | | | | | | |

|1980 = | | | | | | | |

|100 | | | | | | | |

|Real |116 |115 |115 |126 |121 |n.a. |114 |

|per | | | | | | | |

|Capita | | | | | | | |

|Disposa| | | | | | | |

|ble | | | | | | | |

|Income | | | | | | | |

|in | | | | | | | |

|1989, | | | | | | | |

|1980 = | | | | | | | |

|100 | | | | | | | |

|Current|Aggressi|Ambitious|Transiti|Reform |Modest |1990-91:|Politica|

|Economi|ve |transitio|on |began in|reforms |Limited |l |

|c |pursuit |n plan in|pursued |1991; |from |first |turmoil |

|Reform |of |progress:|with |price |1991; |steps; |and an |

| |transiti|stabiliza|caution;|flexibil|price |decentra|economy |

| |on, |tion, |initial |ity, |adjustme|lization|largely |

| |privatiz|privatiza|results |privatiz|nt, some|, some |without |

| |ation |tion, and|not as |ation, |privatiz|privatiz|guidance|

| |continue|attention|good as |and |ation, |ation, | |

| |s |to trade |in |trade |and |and | |

| | | |Poland |reform |foreign |restruct| |

| | | |but | |investme|uring | |

| | | |positive| |nt | | |

Second, the initial results of the transition have been generally as

expected. In Table2 I summarize a number of useful indicators. As

anticipated, in all cases there has been a downturn in output —

occasionally a downturn of significant magnitude. Inflation has been very

uneven and in some cases (such as Yugoslavia and pre-reform Poland) very

rapid. However, post-reform inflation rates generally leave some room for

optimism, especially in those cases where stabilization policies have been

developed and applied.

Third, we have noted that initial privatization usually proceeded

rather quickly but that, after the privatization of small firms (especially

in the service sphere), the pace of change decreased significantly. This

latter development reflects the onset of major difficulties: the private

sector must now absorb large, state-owned, loss-making, and often

technologically backward enterprises. The privatization of these firms

presents serious problems, as does a setting where valuation is fraught

with difficulties, buyers are hard to find, claims from the past must be

handled, and contemporary management skills are wanting.

Fourth, although inflation and unemployment have necessitated a

growing concern for safety-net measures of various types, there is also a

sense that the availability of consumer goods and services has improved.

All of these considerations seem to support a measure of optimism

about the eventual outcome of the transition process. At the same time,

there are important dimensions where change must be sustained if the

transition is to be successful. Stabilization policies must be maintained —

a tall order in those cases where consumer patience is lacking.

Privatization must proceed, and it must increasingly reflect the contours

of new market arrangements, including the infrastructure required for

markets to function effectively. These changes must be sustained even in

the face of political dissension, consumer dissatisfaction and an uncertain

international economic environment. These restraining forces will in large

part dictate the pace and ultimate success or failure of the transition

process.

3. Moldova’s way to an open economy.

Moldova has faced significant and escalating economic difficulties

since its acquisition of independence in 1991. This situation is reflected

in the main macroeconomic indicator for the republic - Gross Domestic

Product (GDP) -, which has dropped by nearly 60%.

The agricultural sector has been strongly impacted by the nation’s

economic difficulties, as well as by adverse environmental conditions. In

1993 Moldova’s agricultural harvest was adequate, a considerable portion

remained uncollected and unprocessed due to lack of fuel, transportation,

and financial resources. In addition, due to early November frosts,

hundreds of thousands of tons of fruit, vegetables, and tobacco were

damaged beyond use. In the summer of 1994, a simmilar stream of natural

disasters, including a drought, followed by a hurricane, followed by a

flood, caused even greater losses than those experienced the previous year.

The devasting flooding in August 94 alone brought about losses totaling US$

= 220 million, which exceeded the amount of Moldova’s industrial activities

include: refrigerator, television furniture, clothing, and agricultural

machinery production. The Republic’s threatens the productivity of this

sector. Of the republic’s 262 production enterprises, 60% experienced

production declines. Over all in 1993, many industrial enterprises operated

at levels 50% lower than their full potential.

The decline in production has negatively influenced the budgetary

capacity of the Moldovan Government to address social and other issues. In

November 1994, for example, budget areas reached a level of US$ 70 million.

As a result sizable delays exist in payments of mages, pensions, stipends

and other allocations. Natural resources within the country are few. The

situation in Moldova’s energy sector is strained, therefore, more so as

nation’s capacity to import energy continues to deteriorate. All types of

fuel, including coal, oil and natural gas, delivered from the Russian

Federation, equaled US$ 250 million as of late 1994.

Nevertheless, despite the above mentioned difficulties, economic

reform -including privatization and the transition to a market economy - is

being actively pursued in Moldova current economic crisis and into a more

healthy economic state.

Building of the state and its sovereignty has allowed Moldova to

accomplish some important achievements in economic reform, i.e., financial

stabilization on a macroeconomic level and a lessening of the economic

crisis and its social impact.

The success of macroeconomic stabilization has also helped to increase

the level of confidence and trust in Moldova amongst the international

community. The reforms are being supported by foreign creditors and by

technical assistance from donors, including the United Nations, the

European Union, USA, Germany and Netherlands.

In order to further development the private sector, it is necessary to

continue reforms and to improve mechanism supports and stimulating them.

Further-more, macroeconomic stabilization will not last unless the reforms

reach all parts of the national economy.

Although the hand code contains some contradictions, new important

measures on agriculture have been taken, such as the liberalization of

economic activity and privatization of the industrial sector of the

agroindustrial complex, contributing to a relative stabilization of the

market for food products and to an increase in imports.

Success in promoting economic reforms in Moldova - privatization of

the state property, liberalization of prices in the real estate market

liberalization of intern, trade, establishment and development of the

banking system and of the financial market - allowed Moldova to be placed

in the 11th position amongst the 25 countries of Central and Eastern

Europe, the Baltic states and the Commonwealth of Independent States (CIS)

in a classification made by the European Bank for Reconstruction and

Development.

We can, therefor, conclude that 1995 was the first year of transition,

following the first destructive stage of the reforms, to a better stage.

However, although macroeconomic stabilization is encouraging the

continuous evolution towards a market economy, it does not guarantee an

increase in the national economy. These problems will require a longer

period to solve than that required for achieving macroeconomic

stabilization.

Economic Performance in Moldova 1989-1995:

| |1989 |1990 |1991 |1992 |1993 |1994 |1995 |

|Annual Output |8,8 |-1,5 |-18,0 |-29,1 |-1,2 |-31,2 |-3,1 |

|Growth | | | | | | | |

|Annual |4,5 |110,0 |162,0 |1276,4|788,0 |329,4 |30,2 |

|Inflation | | | | | | | |

Conclusion

In conclusion to all said I want to present a brief survey of the

present stage reached in the transformation process in the various

countries of Eastern Europe. As an initial, superficial impression, it can

be said that the farther west the countries a located, the more advanced

the process now is.

- The transformation process is at its most advanced in Poland,

Czechoslovakia and Hungary. All three countries now have stable

parliamentary democracies in which non-communist parties hold the

majority. Although the initial situations in the three countries

were very different, they have also all set about establishing a

market economy system with considerable energy. Since it is thus in

these three countries that the most experience has now been

gathered, I have considerate my remarks on them (later on).

- In the political sense the situation in the three Baltic countries

is similar to that of Poland, Czechoslovakia and Hungary. They too

have completed the change to parliamentary democracy. However,

economic transformation is especially impeded by the fact that

owing to their histories as Soviet republics their economics are

particularly closely interwoven with thus of to rest of the former

Soviet Union.

- Romania, Bulgaria and Albania have so far made less progress than

their counterparts to the north and west both in the political and

the economic transformation process. Here too, though, freely

elected parliaments have now undertaken the first legislative steps

towards crating a market economic order. However, it is still early

as yet to assess the political stability of these countries or the

success of the economic reform they have so far embarked upon.

- What path will be taken in future by the successor states to the

former soviet Union and those of former Yugoslavia is, in my

opinion, still a totally open question. Neither the geographical

borders of these countries nor their political or economic systems

can be foretold with any degree of certainty.

- Finally, the former East Germany occupies a special place, amongst

the transforming countries. On the one hand, reunification with

former West Germany has ensured that the conditions for political

and economic transformation are now absolutely secure. On the other

hand, the fact that income levels for those in employment have been

rapidly catching up with those in the west has also crated

considerable growth and employment problems. In the real world, the

transformation process has proceeded very differently in the three

furthest advanced countries of Poland, Hungary and Czechoslovakia.

In Poland and Hungary, the planned economy system had gradually

been shot through with various holes during the past ten years, in

stark contrast to Czechoslovakia and East Germany.

1. Clague Christpher : The Emergence of Market Economics in Eastern

Europe, 1992

2. Blanchard O., Layard R. : Economic Change in Poland, 1990

3. Kornai I. : The Road to a free Economy

4. Rausser G.C. : A Noncooperative Model of Multilateral Bargaining

5. Schumpeter I.A. : The Theory of Economic Development

6. World Bank : World Development Report, 1990

7. Giersch H. : Tawards a Market Economy in Central and Eastern

Europe, Berlin 1991

8. Kahtzenbach Erhard : Problems of Reconstructuring in Eastern Europe

9. Gregory P.R., Streart R.C. : Comparative Economic Systems

10. Hartmats R: Making markets: Economic transformation in Eastern

Europe and the Post Soviet States.

-----------------------

Micro

- Prices

- Wages and Safety Net

- Enterprise Guidance

Macro

- Money

- Budget

- Incomes

- Trade

Privatization Emphasis:

Markets and Infrastructure

n

Short Term — Small

Firms

Long Term — Large

Firms

Problems: Valuation, Identifying New Owners, Updated Capacity, Loss Making

Transition Policies Emphasis: Stabilization

Economic Reform Program

Political Reform