Transition

Report on the paper

 

'The Post Socialist Transitions in Comparative Perspective:

Policy Issues and Recent Experience' by Andres Solimano

 

Richard J. Stendardo:

Economic transitions are not a phenomenon unique to Eastern Europe.  World Bank economist Andres Solimano compares the economic revolutions occurring in Eastern Europe to transitions that occurred in China and some Latin American countries during the late 1970s and 1980s.  Solimano proposes three different strategies with which to undertake the transition: shock treatment, gradualism, and "mixed packages", and then analyzes their effectiveness in the nations which have applied them.
 As an example of gradualism, Solimano points out the economic changes that have occurred in China over the last fifteen years.  He believes that a slow, methodical approach to the transition will prevent the "sharp and protracted demand restraint at the macroeconomic level associated  with shock therapy [involving] a contraction in both current and probably in future output".  In addition to this, the rapid liberalization associated with shock therapy will supposedly destroy any remaining economic stability, causing unemployment to rise, the real wage to fall, and loss of public support for the transition.  By applying the correct measures over a duration that allows the economy to adjust to each step, Solimano believes the economy can grow continuously throughout the transition.  This adjustment time supposedly allows the people time to change the way of life they've maintained for decades and prevents economic hardships from becoming severe enough to cause public discontent with the process.  He points out that this was the case in China where steps were taken towards a market economy while the nation saw an average 7.6% increase in per capita GDP over the period.
Solimano continues by attacking shock therapy.  He believes its chief objectives are to avoid long term inflation, reduce national deficits, and privatize industry, however he doubts its ability to do any of these things in the short term.  Although it is readily accepted that rapid liberalization will cause an initial jump in prices, Solimano directs the reader to similar policies in Chile and Bulgaria where inflation remained high for over a decade.  Solimano also believes the tight fiscal policy used to control prices will cause large drops in demand which will lead in turn to an even worse fiscal situation.  And as a final criticism Solimano points out that privatization will inevitably take place over years rather than months; most nations cannot tolerate politically such a large, long term drop in domestic output.
Solimano calls his third plan "mixed packages".  It uses shock therapy to stabilize the economy while gradualism is applied to affect liberalization and structural reforms (including privatization and legislative reforms).  The author submits that this strategy would attack a serious economic crisis while recognizing "that structural reforms take longer than expected and require a more gradualist approach".
 Among these plans for transition it is obvious that Solimano prefers the gradualist approach, however in the context of Eastern Europe it appears gradualism is failing the nation that has embraced it most.  Hungary has a huge external debt estimated at $18.5 billion.  This makes privatization extremely difficult because it is almost impossible to get large amounts of credit, and in turn makes an economic recovery unlikely in the foreseeable future.  The trouble that gradualism has gotten Hungary into amounts to a steady 12% unemployment rate, price inflation hovering just over 20%, and a GDP that will continue to slip in 1994.  These figures should be compared with Czechoslovakia which dealt with inflation that was initially higher and an initially larger drop in GDP due to the effects of shock therapy, but now has a 3.5% unemployment rate and price inflation at 10% and falling.  After four years of negative growth the Czech economy is expected to show a positive change in GDP this year also. 
It would appear that the lessons Solimano tries to draw from China and Latin America do not readily apply to Eastern Europe.  Shock therapy appears to serve those who use it well; gradualism seems economically less viable than sticking with a socialist economy.  The result for Hungary has been what seems aimless drifting due to political discontent and the election of leaders fearful of making painful decisions.  Perhaps if they had swallowed the medicine called shock therapy in the first place, Hungary's economy would be healing.

Heinrich, Hans-Georg.  Hungary.  Boulder, Colorado: Lynne Rienner Publishers, Inc., 1986.

Murrell, Peter.  "What is Shock Therapy." Post Soviet Affairs 9(2) (1993): 111-40.

Solimano, Andres.  "The Post Socialist Transitions in Comparative Perspective: Policy Issues and Recent Experience."  World Development 21(11) (1993): 1823-35.

 

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