From Plan to Market: Patterns of Transition

Abstract

Among the findings from this analysis of patterns of transition: Liberalization is essential to stabilization despite an initial spurt in prices. And economic recovery depends on the duration as well as the intensity of liberalizing internal and external markets and facilitating private sector entry.

In analyzing the transitional experience of countries in Central and Eastern Europe(CEE) and the former Soviet Union (FSU), de Melo, Denizer, and Gelb find strong common patterns for countries at similar stages of reform despite differences in initial conditions. To establish rankings, the authors create a reform index combining the intensity and duration of economic liberalization.

Freeing domestic prices is one element of reform captured by the index; it was needed to enable governments to cut subsidies and restore macroeconomic balance. Other dimensions of reform captured by the index are liberalization of external trade, including foreign currency convertibility, and facilitation of private sector entry through privatization of state enterprises and improvements in the environment for private sector development. Some countries moved faster on reform than others, and one major reason appears to have been the pace of political liberalization.

Liberalization has encouraged capital and labor to reallocate from industry toward services, many of which were previously repressed; and the repressed sectors fueled the return to positive growth in fast reformers. For slow reformers, the main problem in achieving stabilization has been the continued monetization of fiscal and quasi-fiscal deficits, associated with attempts to maintain employment in the old system.

Among the policy implications: ° Stabilization is a priority for the resumption of growth, and this requires extensive liberalization. ° Stabilization is made difficult by output contractions in the early stages of liberalization (they reduce tax revenues and raise claims on fiscal resources to cushion the effects), by limited external financing, and by very large depreciations of the real exchange rate. ° Contrary to previous suggestions, there is no evidence that a slower pace of reform strengthens the fiscal position of slow reformers; their consolidated fiscal and quasi-fiscal deficits are quite high.

This paper - a product of the Transition Economics Division, Policy Research Department - is part of a larger effort in the department to synthesize the adjustment experience of countries in transition from socialism to a market economy. The authors may be contacted at [e-mail] or [e-mail].