Ten Years of Postsocialist Transition: Lessons for Policy Reforms

29 Pages Posted: 23 Sep 1999

Date Written: April 1999


Transition to a market economy is a lengthy process comprised of various spheres of economic activities. The naive belief that a market economy can be introduced by "shock therapy" is wrong, and in several cases, when attempted, has caused more problems than it has solved. Because a market economy requires adequate institutional structures and an appropriate behavior, transition can be executed only in a gradual manner, since these are very gradual processes based upon new organizations, new laws, and the changing behavior of various economic entities.

In 1989, influential financial organizations, political bodies, and professional economists seemed to agree upon main points for economic policy reform. This was termed the Washington consensus. Despite the fact that the economic policy of the Washington consensus was initially developed without any concern for post-socialist transformation, it has happened that these ideas have significantly influenced the path of thought and action in Eastern Europe and the former Soviet Union. Because these policies were not intended for the overhaul of post-socialist countries, however, they have failed.

A new, post-Washington consensus is developing, as it should, based on the lessons learned from experience thus far. Some major policy conclusions can be drawn:

First, institutional arrangements are the most important factor for progress toward durable growth.

Second, policy must recognize that institution building by its nature must be a gradual process.

Third, policy makers must acknowledge that the size of the government is less important than the quality of its policy and the manner of the changes of government dimension.

Fourth, if institutional arrangement is neglected and left to the spontaneous processes and unleashed forces of liberalized markets, then informal institutionalization fills the systemic vacuum.

Fifth, in transition economies' policies must transform and streamline the judiciary system to serve the market economy.

Sixth, a shift of competence and power from the central government to local governments is necessary for deregulation of the post-socialist economy.

Seventh, there is an urgent necessity to accelerate the development of non-government organizations.

Eight, during transition income policy and government concern for equitable growth has great meaning.

Ninth, short-term capital liberalization must be monitored and controlled by the countries' fiscal and monetary authorities with the support of international financial institutions.

Tenth, the Bretton Woods organizations should reconsider their policies toward transition economies aiming at institutional building and support for equitable growth.

JEL Classification: P21

Suggested Citation

Kolodko, Grzegorz W., Ten Years of Postsocialist Transition: Lessons for Policy Reforms (April 1999). The World Bank Policy Research Working Paper No. 2095. Available at SSRN: https://ssrn.com/abstract=170888

Grzegorz W. Kolodko (Contact Author)

Kozminski University ( email )

Jagiellonska 59
Warszawa, --- Select One --- 03301

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