Реферат: Creating Market Economy in Eastern Europe

--PAGE_BREAK--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.

--PAGE_BREAK-- 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.TheEmergence 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






Eastern Europe


















East Germany
























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
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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.


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.

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