Creating Market Economy in Eastern Europe
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
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