Theory     

 

 

 


Ivan T. Berend
 

From Plan to Market,
From Regime Change
to Sustained Growth
in Central and Eastern Europe
By Ivan T. Berend
 

Full text


 

Excerpts

 

As a critique of the laissez-faire concept in interpreting Central and Eastern European transformation, I would suggest that the process does not end with systemic change.  Laissez-faire interpretations maintain that economic growth, prosperity, and catching up are automatic outcomes of marketization.  The reality is different.  Systemic change, in the sense of economic transformation, would be senseless without creating the potential to respond to the challenge of the technological-structural revolution of the age.  Successful restructuring cannot be the mere result of marketization and privatization.  It cannot happen without the massive participation of transnational companies.  Their investments, however, is not guaranteed and might be a mixed blessing.  Appropriate international and national environments are required to generate a spin-off effect and avoid the rise of a dual economy with advanced foreign enclaves in an environment of continued peripheral backwardness.  ...

 

State socialism collapsed in Central and Eastern Europe a decade ago.  ....From the very beginning, a vast literature of “transformatology” came into sight.  Advisers of newly appointed governments, scholars, and experts of various international institutions worked out hundreds and thousands of studies, recommendations and critical analyses alike.  A broadly accepted set of criteria for a reform program, the so-called Washington consensus of 1989, ... was offered as a blueprint for the process of Central and East European economic transformation.[1]  This prescription was offered for former state socialist countries by the international financial institutions: the International Monetary Fund, World Bank, and the American administration.  Its central elements were macro-economic stabilization those countries with significant inflation and indebtedness; the building of new institutions, and legislation necessary for a market economy; price and trade liberalization, and radical privatization ...


[1]  Williamson, John, “The Washington Consensus Revisited” in: Louis Emmerij (Ed), Economic and Social Development into the XXI Century, Washington D.C.: Inter-American Development Bank, 1997.

 

Most of the “transformatology” literature, ... is based on the ...assumption that ...a restoration of market, and private ownership, paired with a laissez-faire free market system would automatically solve all of the major economic and even social problems of the transforming countries.  .... “The economic reforms,” stated Jeffrey Sachs in 1991, “will set in motion a sustained process of economic restructuring…Once market forces are unleashed, there should be a strong pull of resources into the previously neglected [service] sectors…Agriculture is another area where we should expect major restructuring…The third major trend that we should expect is a complete restructuring within the industrial sector, from energy-intensive heavy industry to more labor-intensive and skill-intensive industries that can compete on the world market…Western firms…are likely to set up operations…for the sake of export production, in the same way as European firms are investing in Spain…”[1]


[1]  Sachs, Jeffrey, “The Economic Transformation of Eastern Europe: The Case of Poland”. In: Poznanski, Kazimierz Z.,  Stabilization and Privatization in Poland, Boston: Kluwer Academic Publishers, 1993, pp. 208-9.

 

          ...The competition of advisers and new governments in radicalism ... to unleash almighty market automatism was ...a consequence ...of the Zeitgeist of the 1980s and 1990s, dominated by a Chicago school version of laissez-faire ideology, or, as George Soros named it, market fundamentalism, which “disregard social values” and “seeks…to impose the supremacy of market values...”.[1]  ... 

The speed is important if you have to go through the “valley of tears” (Dahrendorf).  The faster one concludes transformation, ...., the better it is,....  As Michael Mandelbaum of Council on Foreign Relations most characteristically phrased it, “If the people…can endure the hardship that the policies of stabilization, liberalization, and institution building inflict, they will emerge at the other end of the valley of tears, into the sunlight of Western freedom and prosperity”.[2]


[1]  Soros, George, The Crisis of Global Capitalism, New York: Public Affairs, 1998, pp. XVII-XVIII, 196.

[2]  Mandelbaum, Michael, “Introduction,” in: Sh. Islam and M. Mandelbaum (Eds), Making the Markets. Economic Transformation in Eastern Europe and the Post-Soviet States, New York: Council on Foreign Relation Press, 1993, pp.11,15.

 

Thinking in the framework of the laissez-faire paradigm, the dramatic decline in output and GDP during the early 1990s was not as bad as the people of the region thought, because, things first had to be worst to get better later.  The dramatic economic crisis is nothing else, as János Kornai interpreted, than a “painful side effect of the healthy process of changing the system”.  A “transformational recession,” caused by a transitory “shift from the sellers’ to a buyers’ market; contraction of investment; a shift in the composition of foreign trade; disruption of coordination, enforcement of financial discipline”.  The appropriate cure of the malaise is to “accomplish the task [of market reforms] faster”.[1]  Jeffrey Sachs similarly warned in 1991: “The time in the valley [of tears] depends on the consistency and boldness of the reforms.  If there is wavering or inconsistency in economic measures, it is easy to get lost in the valley.  Argentina has been lost for forty-five years”.[2]  He, as well as many others, advocated “comprehensiveness and speed in introducing the reforms” which “can and should be introduced quickly, in three to five years”.[3]  He also maintained that “macroeconomic stabilization can also be achieved relatively quickly”.  However, he added, restructuring that follows reform will take “presumably a decade or more”.[4]


[1] Kornai, János, “Anti-Depression Cure for Ailing Postcommunist Economies”. Transition. The Newsletter About Reforming Economies, 1993, February, p.2.

[2]  Sachs, Jeffrey, “The Economic Transformation of Eastern Europe: the Case of Poland”. In: Poznanski, Kazimierz Z. (Ed), Stabilization and Privatization in Poland. An Economic Evaluation of the Shock Therapy Program. Dodrecht: Kluwer Academic Publishers, 1993, p. 210.

[3]  Ibid, pp. 198-9.

[4]  Ibid, p.198.

 

This concept implicitly suggests that Eastern European backwardness is a mere consequence of the planned economy and state socialism.  If this was the case, indeed, it would be enough “to return to normalcy” by introducing Western type of market economy by bold and radical reforms.
In reality, the backwardness of the area ... has a long history.  During the second half of the 19th century most of the area adopted the Zeitgeist of laissez-faire, free trade and export-led industrialization, and joined the international European economy.  That attempt, however, failed, or, at least met with only limited success: Central and Eastern Europe remained agricultural, rural, and traditional, compared to the industrialized and urbanized West. [1]  After World War I, in a radical departure from the past, the countries of the region turned to economic nationalism, introduced high protective tariffs, strong state interventionism, some kind of planning, and replaced export-led policy with import-substitution.  The result, nevertheless, was the same semi-failure and continued backwardness.[2]  The planned economy of state socialism was only a new, bitter, and extremist version of economic nationalism.  State interventionism and autarchy served to avoid hopeless competition, and reach the Western level.  The effort, again, failed.  In other words, Central and Eastern Europe, consequently, is not in a position to simply reject the unpleasant and unsuccessful intermezzo of the last half a century and “return to normalcy”.  Rebuilding a private-market economy with all of its institutions and legal prerequisites, i.e. systemic change itself, cannot simply produce a mechanism of successful sustained growth, leading to catching up.  This mechanism has never worked in this area.  A brief comparison can illuminate the longue durée of economic trends in the region: [3]

 

Central and Eastern Europe’s
per capita GDP
as percentage of the West

 

Regions 1870 1913 1938 1973 1989
Western Europe 44 44 44 45 40
Overseas West 32 30 35 38 32

 


[1]  Berend, Ivan T. – György Ránki, Industrialization and the European Periphery1780-1914, Cambridge: Cambridge University Press, 1982.

[2]  Berend, Ivan T., Decades of Crisis: Central and Eastern Europe Before World War II, Berkeley: University of California Press, 1998.

[3]  Maddison, Angus, Monitoring the World Economy 1820-1992, Paris: OECD, 1995, p. 212.

 

The aggregate, comparative index of economic development levels, GDP per capita, clearly shows that during the three-quarters of a century, between 1870 and 1983, market and private economy could not generate automatic prosperity and the catching up process.  Central and Eastern Europe’s relative position vis-à-vis Western Europe and the overseas West remained unchanged.

The change of the regime, however, is far from equivalent to an automatic beginning of sustained growth and catching up.  As an economic historian of the region, I strongly argue against the implicit assumption of a great deal of transformatology literature suggesting that sustained economic growth and catching up with the West is an automatism which starts to work when a country adopts the Western market model.

 

At this point, I must return to the often-analyzed question of economic decline, or “transformational recession” in the early 1990s.  Was it, indeed, a merely unavoidable consequence of changes from the plan to the market, as, among many others, János Kornai interpreted?[1]  In my view, the “transformational recession,” as Kornai named it, was only one element of a long, deep, and complex economic crisis in the area.  One should not forget that the crisis had begun much earlier, basically from the mid-late 1970s, when the steam had already run out of the economic drive of forced industrialization in Central and Eastern Europe.  Growth slowed significantly – from an annual 3.1 per cent and 3.5 per cent between 1950 and 1973 to 1.3 per cent and 1.2 per cent between 1973 and 1989 in Czechoslovakia and Hungary respectively.[2]  Between 1978 and 1983, Polish GDP declined by more than 10 per cent.  During the second half of the 1980s, Romania experienced 0.7 per cent, Yugoslavia 0.5 per cent, and Poland 0.2 per cent annual growth, compared to the 3.6 per cent growth rate of the OECD countries.  Aside from this, the terms of trade for the state socialist countries began to deteriorate: ... Foreign trade deficits dramatically increased, and almost all of the region’s countries dropped into an indebtedness trap.  .....


[1]  Kornai, János, “Transformational Recession. A General phenomenon Examined through the Example of Hungary’s Development”. Discussion Paper No.1. Collegium Budapest, Institute for Advanced Study, June 1993.

[2]  Maddison, Angus, Explaining the Economic Performance of Nations, Aldershot: Edward Elgar, 1995, p. 97.

 

Serious policy mistakes also contributed to the economic drama of the early 1990s.  Richard Portes noted “serious macro-economic policy errors…[such as] initial excessive devaluation of the currency”.  Instead, he recommended, “do not devaluate excessively; peg initially: then go to a crawling peg”.  Another major policy mistake was that “the opening to trade with the West – with convertibility, low tariffs, and few quantitative restrictions – was too abrupt…”.[1]  Domenico Nuti rejected the interpretation of economic decline as a “necessary concomitant of transition”.  In his view, it was an “unnecessary consequence of policy failure”.  Most of all “the failure in government management of the state sector”.[2]


[1]  Portes, Richard, “From Central Planning to Market Economy”. In: Islam, S – Mandelbaum, M. (Eds), Making Markets. Economic Transformation in Eastern Europe and the Post-Soviet States, 1993.

[2]  Nuti, Domenico,  “How to Contain Economic inertia in the Transitional Economies?” Transition. The Newsletter About Reforming Economies. The World Bank. Vol.3, No.11. December 1992-January 1993.

 

The economic policy during the first part of the transition period was, however, in many respects, mistaken.  The difficult transformation process required a pragmatic and ideologically non-biased approach to reality.  The countries of transformation should not have had to attempt to jump directly from a centrally planned to a laissez-faire economy, from an entirely state-owned to a one hundred percent privatized economy.  State regulations and government policy were needed in the difficult transformation process when self-regulating mechanisms were not yet developed and market imperfections and non-market friendly behavior among the players was the rule.  A regulated market, instead of a self-regulating market, a mixed economy with a restructured and efficient state-owned sector for at least a period of time, and a “fine mixture between market and state”[1] would have been a more natural transition from plan to market.  This approach, however, was immediately rejected and most of the transforming countries rushed to join the Reaganites and blame “big government”, and state intervention.  It caused unnecessary pains, led to the collapse of a great many old companies, which lost the bulk of their value and had to be sold for a fraction of their previous value.  All these contributed to mass unemployment, a sharp decline in living standards, especially for certain rather vulnerable layers of the society.  People in poverty, those with incomes less than 35 per cent to 45 per cent of the average wage, increased from 14 per cent to 54 per cent in Bulgaria, from 4 per cent to 25 per cent in the Czech Republic, from 25 per cent to 44 per cent in Poland and from 34 per cent to 52 per cent in Romania during the early 1990s.[2]  “Living standards of 57 per cent of the population of Russia”, reported the journal of the World Bank in October 1999, “are below the minimum subsistence level…the average life expectancy does not exceed 61.7 years”.[3]  Social polarization, an emerging mortality and health crisis, sharply declining life expectancy sharply declined – all of them phenomena typical for 19th century “wild capitalism,” or, very late 20th century “bandit capitalism”, as two leading economists, N.Stern and J.Stiglitz named it.[4]


[1]  Kolodko, Grzegorz, Transition to a Market economy and sustained Growth: Implications for the Post Washington Consensus, p. 45.

[2]  Central and Eastern Europe in Transition: Public Policy and Social Conditions: Crisis in Mortality, Health and Nutrition,  UNICEF, Economies in Transition Studies, Regional Monitoring Report No.2, August 1994, p. 2.

[2]  Transition. The News Letter About Reforming Economies, The World Bank, Vol.10, No.5, October 1999, p. 35.

[4]  Stern, Nicholas – Joseph Stiglitz, A Framework for a Development Strategy for Market Economy: Objectives, Scope, Institutions and Instruments, European Bank for Reconstruction and Development. Working Paper 20, London: European Bank for Reconstruction and Development, April 1997.

 

Can all these be considered unavoidable ...?  Peter Murell’s theoretical explanation hit the head of the nail: “Economic and political decisions”, he maintains, “are circumscribed by limits in social knowledge…inherited from the past…If one attempts to eradicate all…characteristics [of existing organizations] immediately, then one invites economic collapse…Large changes in the legal and policy framework produce highly dysfunctional outcomes…”.[1]  Not only speed and scope, but the inappropriate adoption of the laissez-faire market model also caused “highly dysfunctional outcomes”.  Grzegorz Kolodko, arguing against laissez-faire policy,[2] quotes three genuine authorities, George Soros, the World Bank, and IMF’s Stanley Fisher: “The untrammeled intensification of laissez-faire capitalism and the spread of market values into all areas of life”, warns Soros, “can cause intolerable inequities and instability”.[3]  “Establishing a social consensus will be crucial for the long-term success of transition”, argues the World Bank in its report on “From Plan to Market”, since “societies that are very unequal in terms of income, or assets tend to be politically and socially less stable and to have lower rates of investment and growth”.[4]  Stanley Fisher argues in the same way: “adjustment programs that are equitable and growth that is equitable are more likely to be sustainable”.[5]


[1]  Murell, Peter, “Evolutionary and Radical Approaches to Economic Reform”. In: K.Z. Poznanski (Ed), Stabilization and Privatization in Poland, p. 222.

[2]  Kolodko, Grzegorz, Ten Years of Postsocialist Transition. Lessons for Policy Reform. Working Paper 2095. Washington: The World Bank, 1999. (The next three quotations are from pp. 14, 17.)

[3]  Soros, George, “The capitalist Threat”. The Atlantic Monthly, February 1997.

[4]  From Plan to Market. World Development Report 1996. Washington D.C.: The World Bank, 1996.

[5]  Fisher, Stanley, “Opening Remarks.” Conference on Economic Policy and Equity, Washington D.C.: The International Monetary Fund. June 1998, p. 1.

 

Regulation, state intervention, and a mixed economy are among the requirements for Central and Eastern European transformation.  After a decade, it is clear that all of the transformational economies are mixed economies, and this fact, provided that they adopted good policy, did not block the road for successful transformation at all.  In Hungary, one of the success stories of transformation, “under the privatization law, 92 firms will remain in permanent state ownership”.[1]  In one of the most successfully transforming countries, Slovenia, “the state still owns more than 50 per cent of total assets in the economy”.[2]  The state needed and still needs to guide the extremely complex process of transformation.  In 1997, the World Bank called the attention to the important role of governments in various fields where market automatism will not work.[3]  Governments have a role in macroeconomic policy, investment in basic social services, education, training, and infrastructure, creating and keeping a strong social safety net in order to prevent disastrous social side effects for the most vulnerable parts of the society.


[1]  Transition Report Update April1999, European Bank for Reconstruction and Development, London, 1999, p. 38.

[2]  Ibid, p. 44.

[3]  The State in a Changing World. World Development Report 1997, Washington D.C: Oxford university Press for the World Bank.

 

The interpretation of the East European economic crisis as basically a long depression of non-adjustment to a changing world economy, a peripheral structural crisis (deepened by transitory factors), might be strengthened by comparing it with the strikingly similar performance of other peripheral but non-state socialist countries in the world.
          Believers in an almighty market automatism, however, argue that consistently reforming Central Europe is already elevated to the stage of sustained growth, while the hesitantly reforming Balkan and post-Soviet countries are still “lost” in the valley of tears.  The European Union, evaluating economic transformation in Hungary and Slovenia, announced on July 15, 1997: “Hungary can be regarded as a functioning market economy.  Liberalization and privatization have progressed considerably…Hungary should be able to cope well with competitive pressure and market forces within the Union in the medium term…  Hungarian enterprises are already competitive in EU markets…”.  The same was said about Slovenia, Poland, and the Czech Republic.
In the group of at least six Central European countries – Poland, the Czech Republic, Hungary, Slovenia, Slovakia, and Croatia – market economies are functioning, economic decline and rapid inflation are over, the annual economic growth is impressive.  The “well functioning market economies” basically recovered the early decline and mostly reached the 1989 level of per capita GDP.

              
GDP % change from previous year;
last column = 1999 as a % of 1989
[1]

Country 1990  1991 1992 1993   1994  1995 1996 1997  1998* 1999**   %
Croatia  -9.3    -28.7 -11.7 -8.0  5.9  6.8 6.0  6.5 2.5 1.0  79
Czech R.   –1.2 -14.2  -3.3  0.6 3.2  6.4 3.9 1.0  -2.7  0.0 95
Hungary -3.5   -11.9   -3.1  -0.6 2.9 1.5 1.3 4.4 5.0 4.2 99
Poland -8.0   -7.6 2.6  3.8  5.2 7.0 6.1 6.9   4.8  3.0 121
S lovakia -2.5 -14.5  -6.5 -3.7 4.9 6.9 6.6 6.5 4.4 1.0  101
Slovenia -4.7 -9.3 -5.5  2.8  5.3  4.1  3.3 3.8 4.0   3.8  107


*estimated, ** projected. 


[1] For 1990-1: Wiener Institute für Internationale Wirtschaftsgeschichte Research Report, No.207, Wien, July 1995; For 1992-99: European Bank for Reconstruction and Development Transition Report Update, London, April 1999, p. 6.

 

It is important to clarify that reaching the 1989 economic level in 1999 does not prove that these countries have arrived “to the other end of the valley of tears” and already enjoy the “sunlight of Western freedom and prosperity” (Mandelbaum).  They hit the bottom then recovered the deep decline.  Additionally, industry recovered only in two countries, Poland and Hungary.  Real industrial output reached the 1989 level in these countries in 1997-98, while Slovenia, Slovakia, and the Czech Republic recovered only by 75-80 per cent until 1999.[1]  But we might not forget that the gap between them and the West, in that single decade increased from the nearly 1:2 level in 1989 to a 1:3 and 1:4 difference in 1999.  The gap between East and West, as a consequence, is broader than ever in modern history.


[1]  Economic Survey of Europe 1998, No.2, New York: United Nations, 1998, p. 146-8.

 

In some countries, decline reemerged or continued, and they remained increasingly behind, nearing non-European standards.  Bulgaria and Romania, after the severe decline of the early 1990s and a partial recovery of the mid-1990s, experienced a new crisis when output and GDP declined again.  In Russia and Ukraine as well as several other successor states of the Soviet Union, decline has continued without stop throughout the entire decade.  As a consequence, in 1999, Romania and Bulgaria reached only 74 per cent and 66 per cent of their 1989 GDP level respectively.  Russia (53 per cent) and Ukraine (35 per cent), and the entire Commonwealth of Independent States (former Soviet Union) (53 per cent) arrived only at half of their 1990 level in 1999.[1]  In 1989, the ratio between the GDP of Russia and Poland was about 7:1, by 1998; it was roughly 3:1.[2]


[1]  Ibid.

[2]  Kolodko, Grzegorz,  Transition to a Market Economy and Sustained Growth: Implications for the Post-Washington Consensus, 1999, p. 74.

 

 ... the countries in transformation ... have to adjust ... by restructuring the economy according to the requirements of modern technology, and, on this basis, reach a sustained and higher than average growth.  ....adjustment to modern technology ...are not automatic outcomes of marketization and privatization.  ...  “Only a part of the multi-layer transition process, namely liberalization linked with stabilization, can be executed…in a radical manner”, stated Grzegorzg Kolodko, one of the main architects of Polish transformation.  “As for structural adjustment…and behavioral change, they will take a long time under any conditions”.[1]  It needs, argued Peter Murell, a different social knowledge and behavior, since “socioeconomic mechanisms are information-processing devices…a society’s stock of personal knowledge is acquired through a long historical process shaped by the institutions and organizations of that particular society”.[2]  Transformation is not only “a process leading from plan to market”, as Marie Lavigne argues, “it could also be…a process leading from under-development to development”.[3]  Transformation, without development, is quite senseless.  ...  Transformation, thus, must lead to sustained growth and catching up with Europe.  “When is transition over?” asks Marie Lavigne.  When the transforming countries approach the economic level of the least developed members of the European Union.  According to Stanley Fisher (and his co-authors) and Tsuneo Morita, if they achieve a growth rate in the range of 4.5 to 6.0 per cent annually against an assumed 3 per cent growth in the low-income countries of the EU, it may take, in the best possible scenario, about 30 years.  The Czech Republic may reach that level in 10-15 years, Hungary, Poland, and Slovenia in 20-25 years, Romania and Lithuania in 35 years, and Albania in 65-75 years.[4] ...


[1]  Ibid, p. 28.

[2]  Murell, Peter, “Evolutionary and Radical Approaches to economic Reform.” In: Poznanski, Kazimierz Z. (Ed), Stabilization and Privatization in Poland, pp. 219, 221.

[3]  Lavigne, Marie, The economics of Transition. From socialist Economy to Market Economy, New York: St.Martin’s Press, 1999, p. 276.

[4]  Fisher, Stanley, Ratna Sahay, Carlos Végh, “How Far is Eastern Europe from Brussels?” International Monetary Fund, Working Paper No.53, April 1998; Morita, Tsuneo, “The Hidden Growth Potential of EU Candidates,” in: Transition. The News Letter About Reforming Economies, World Bank, Vol.10, No.5, October 1999, p. 9.

 

The key elements of adjustment, ... the adoption of revolutionary new communication technology, high-technology industries, and the building up of a competitive, highly productive export sector, in most cases, have not been achieved.  This process has just started in Hungary, Poland, Slovenia, the Czech Republic, and Slovakia.  The Balkan countries and Russia, with her partners in the Commonwealth of Independent Countries, about two-thirds of the former Soviet Bloc, are not even close to launching a successful technological-structural transformation and have descended into a continuous and deepening crisis.

While systemic change is the result of strong political will and consistent political-social-legal actions, technological-structural adjustment is mostly beyond that sphere. ... [it] is impossible without massive Western investments and the participation of transnational companies, the main carriers of modern technology and innovation.


 Central and Eastern Europe, similarly to other peripheral regions, has never been able to pioneer technological revolutions.  Insufficient resources for research and development, lack of knowledge and know-how, mediocrity and other cultural factors have always been obstacles to innovation and have never allowed a pioneering role in technology for a peripheral country in modern history.  Many scientists and inventors, from the turn of the century on, left these areas to realize their dreams and became successful in one of the rich countries.

 

During the last third of the 20th century, the extreme harshness of the structural crisis in Eastern Europe mostly emerged as a consequence of total inability to adjust to the new world economy under state socialism. .... However, a major, if not the major, factor of the Soviet Bloc’s incapacity was the economic warfare at the Cold War inspiring a strict Western embargo on modern technology transfer to the East. The window of opportunity slowly opened after1989. .... Direct foreign investment become the key factor in technological modernization, and restructuring, in the area.  ....

 

Foreign Direct Investment
in Central and Eastern Europe[1]

Country   Total inflow,
1989-99 in bn $ 
Inflow
per capita in $
Hungary   18.3   1.830
Poland 24.8 653
Czech Republic  13.5   1.350
Central Europe &
Baltics & Balkans 
72.1  566
Former Soviet Union 23.7

84

 

                                               
 ... The comparative attractiveness of a country for foreign investors, measured by the stock of direct foreign investment relative to GDP, shows the unquestionable lead of Hungary and Estonia with a 39 per cent and 35 per cent share respectively.  They are among the leading foreign investment recipients, while the Czech Republic and Latvia surpassed the world average of 15 per cent.  Slovenia and Lithuania are on the world average, while the Balkans’ stock of foreign investments reached 5-6 per cent of their GDP.
[2]


[1]  Transition Report Update April 1999, London: European Bank for Reconstruction and Development, p. 12; Transition. Newsletter About Reforming Economies, Vol.10, No.5, October 1999.

[2]  “Foreign Direct Investment: New Trends in Transition Countries.” Transition. Newsletter About Reforming Economies. The World Bank, Vol10, No.5, October 1999, p. 8.

 

Important investments, thus, had a significant spin-off effect in Central Europe.  They generated the growth of domestic business, which is itself an important contributor to economic growth, especially in Poland.  Small domestic business, however, is rarely able to become technology leader.  Various deals between local governments and transnationals contained clauses of compulsory reinvestment of part of the profit, mandatory use of domestic products and sub-contractors.  Big transnational business, thus, often initiated small local business activities.  Sometimes, as in the case of Volkswagen’s Czech investment, various suppliers of VW also moved to the Czech Republic.  Transnational companies play a significant positive role in Central European restructuring and sustained growth.

Russia, the successor states of the Soviet Union, and most of the Balkan countries exhibited minimal progress in restructuring.  Foreign direct investment was minimal in this area, and mostly went into the extracting branches of oil, gas, and raw materials.  Consequently, export is not the main vehicle of economic development as in Central Europe.  ....  In this part of Eastern Europe, restructuring, in terms of producing competitive modern products based on new technology, hardly made any important steps.  Transnationals are present but do not trigger any significant spin-off effect, ...

 

In those Central European countries, where impressive foreign direct investment assisted technological-structural adjustment, transformation is paving the way to sustained growth and catching up with the West.  These countries became members of NATO and are candidates for European Union membership.  These decisive institutional changes might accomplish progress towards an equal partnership with the West, or perhaps, the road from the periphery to the core of Europe.  Two-thirds of this large region, however, have taken only the very first steps towards, and cannot even meet the basic requirements of transformation into the new age of the Communication Revolution and the 21st century.  They remain seemingly outside the integrating continent, behind a new “Poverty Curtain” as a pruned, deeply disappointed and explosive periphery of Europe.

 

 

 

 

 

 

 

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