Transition  Strategy  

 

Report on the paper

STABILIZATION AND REFORM IN

EASTERN EUROPE
 

by Michael Bruno

 

Maria Cassisi

 

The article discusses various issues in the transformation of the Eastern European central planning systems into market economies. One issue that Bruno addresses is that of the battle between shock therapy and gradualism.
According to the article, the IMF was very surprised at the reaction that the economies of the Central European nations had to the transformation processes. They reacted rapidly and responsively to the new prices and incentives which were presented to their economies.

The article also states that shock therapy and gradualism are both necessary to have complete transformation. Most of the changes should take place on a rapid level. If the changes occur all at once the economy is forced to adjust to its new situation. Shock therapy allows the inflation to be stabilized. Price stabilization as well as internal and external balances may be achieved. The liberalization of asset markets should be part of the shock therapy approach because the adjustments are low in cost and therefore occur rapidly. In other words the economies should be completely submerged in the market economy from the very beginning.

Bruno, however, also believes that there are stages to transformation process which should be done gradually in order for them to be successful. Bruno does believe that prices should be set free and that a market must be established before privatization and currency value setting take place Privatization needs to be done over a longer period of time than price stabilization. The privatization may take 4 to 5 years. Also the labor markets need more time to clear and become workable since it is such a new situation for the population.

This all should be accomplished with the assistance of the government or some supreme "authority." Without guidance and assistance the whole process will not be able to be accomplished on an efficient level. The countries need some stabilizing body which makes the rules of transformation and watches over the rest of the processes which lead to successful conversion to market economies.

It must also be said that shock therapy (i.e. big bang) might have a significant future trade-off for the various countries involved. If the cost (in terms of dollars and/or benefits) to the country and population of these initial procedures is too great there may be a political reversal due to "adjustment fatigue." The countries may simply become too tired of trying and sacrificing, thus regressing to some previous practices that were used in the Central Planning Economy. It is also of note that overall there has been too great an optimism of the responses of the economies to the shocks presented. The best approach to the situation is to have a transformation based on both the shock therapy and the gradualist theories.

 

 

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