Post-socialist transformation in East Central Europe

By Olga Danyukova, Maya Humbatova

Economies in Transition

“The complicity of the challenges facing the so-called transition economies is often described as ‘systemic transformation’, a term that captures the restructuring of the entire social system”. (Bradshaw, Stenning 2)

According to the IMF economy transition steps include:◦ liberalizing economic activity, prices, and market

operations, along with reallocating resources to their most efficient use;

◦ developing indirect, market-oriented instruments for macroeconomic stabilization;

◦ achieving effective enterprise management and economic efficiency, usually through privatization;

◦ imposing hard budget constraints, which provides incentives to improve efficiency;

◦ establishing an institutional and legal framework to secure property rights, the rule of law, and transparent market-entry regulations.

Major steps of economic transformation

CEE Economic Transformation In the countries of Central Europe and the Baltics,

commitment to macroeconomic stabilization came sooner and implementation of structural reforms was firmer. These countries have re-joined the ranks of middle-income countries and can claim to have transitioned.

Why Czech Republic, Hungary, and Poland adapted quicker to the market economy comparing to other CEE countries?

Because of the exposure to capitalism and democracy prior to the WWII and before the eventual breakdown from the communists

Joined NATO and EU which accelerated the economic transition

Case Study: Czech RepublicReplacement of the communist legacy Replacing Central Planning to Free Market

◦ CP officially canceled in autumn 1990◦ Creation of democratic institutions lead to

corruption and mechanism problems before the EU standards were adopted

◦ Legislations and amendments to promote private business in 1990 (amendment to the Economic Code)

◦ Legal framework: Commercial Code, Competition Law, tax laws, Law on Accounting, Bankruptcy Law, and law governing capital markets and securities in 1991-1992

Privatization Types of privatizations done in CR:

◦ Restitution Return of property to those who owned it before the

confiscation or nationalization by communistic power

◦ Small-scale privatization Shops, restaurants, services

◦ Large-scale privatization Nonincorporated enterprises

Auctions, tenders, direct sale, free transfer of property, Incorporated enterprises

Vouchers, public offers and tenders, direct sales, unpaid transfer to the municipalities, restitution funds

Banking Reforms were easier than in

Hungary and Poland because low foreign debt and government deficit <1%

January 1990 the Czechoslovak Monobank transferred into: Comercni Banka, Investicni Banka, Vseibecna Uverova Banka

Banking Act, State Bank Act Privatization of Banks

strategy failed Created new monetary

system that was monitored by the State Bank of CR

Average 1980-1989

2.5

1990 -0.4

1991 -15.9

1992* -8.5

1993 0.6

1994 2.7

1995 6.4

1996 3.9

1997 1.0

1998 -1.5

1999 (estimated)

1.0

GDP per capita of CR *before the split of Czechoslovakia Source IMF, World Economic Outlook 1998

Results Privatization of CR suffered from lingering state

control, delayed privatization of banks Positive Growth happened because:

◦ Favorable development of FDI (Foreign Direct Investment) Good Geographic position Human Capital, Workers Long traditions of manufacturing

The main actors of an economy in transition are:

◦ State sector workers. Face significant loses unlikely to realize any gains.

◦ Potential new entrants. Face initial loses from discipline but are likely to see gains.

◦ Insiders and oligarchs. Benefit immediately from linearization and privatization, as discipline is imposed for further competition, gains are lowered.

Winners/Losers

Public Opinion The poll of 14,760 Eastern Europeans was

conducted in August and September in eight countries: Bulgaria, the Czech Republic, Hungary, Lithuania, Poland, Russia, Slovakia and Ukraine.

According to the poll, one-half of Eastern Europeans say they’re worse off today than they were under communism. Only one-third say they’re better off.

The Globescan poll found that a clear majority of the world’s population favors policies traditionally associated with socialism, including public ownership of major industries, redistribution of wealth, and an active role for governments in regulating businesses.

Works Cited Gowns, Stephen. “Polls show a spectre is haunting Europe…and much of the rest

of the world”.Communism,Socialism.Nov.15,2009.<http://gowans.wordpress.com/2009/11/15/polls-show-a-spectre-is-haunting-europe%E2%80%A6and-much-of-the-rest-of-the-world/>.

Havrylyshyn Oleh,Wolf Thomas.Determinants of Growth in Transition Countries.IMF. June1999.<http://www.imf.org/external/pubs/ft/fandd/1999/06/havrylys.htm>.

Transition, The First Ten Years. The World Bank. 2002.<http://lnweb90.worldbank.org/ECA/eca.nsf/Attachments/Transition1/$File/complete.pdf>.

Shafiqul Islam, Michael Mandelbaum. Making markets. Council on Foreign Relations Press. Googlebooks database. 1993. <http://books.google.com/books?id=hv0VON3aResC&printsec=frontcover#v=onepage&q=&f=false>.

Schnitzer, Martin. Comparative Economic Systems. 8th edition, Sout Western College Pub. 1999. Hanousek, Kocenda, Lizal (eds.). Tale of the Czech Transition: Understanding the Challenges Ahead. Praha 2004.