No. 28, 1995 - From "Great Leaps Forward" to Normalcy: Some Issues in Transitional Policies in Eastern Europe

Following the brief though turbulent period of induced shocks, grand designs and arrogant attempts at large-scale engineering (from above and outside) of the economic and social development of the post socialist countries, we seem to be entering another period. In the years to come, policies, as well as policy discussions will increasingly be directed at more earthly and pragmatic problems concerning short-term, sometimes marginal, costs and benefits of different actions, and day-to-day management of the economy. This is what “peace-time” economic policies are usually about. Instead of proclaiming the agenda of establishing a market economy “in seven days” and making “great leaps forward” (Dornbusch, 1991), discussions will focus on such well-known issues as how to cut back inflation or unemployment by one or two percentage points, whether to devalue the currency now or later, or how the government should support domestic coal mining (if at all).
What seems to be more or less certain for the Central European region as a whole is that economic decline has been so long-lasting and deep, that there has not remained much room for further significant production losses. However, despite loud pronouncements to the contrary, and the obligatory references to Schumpeterian “creative destruction”, radical dismantling of the pre-transition structures, including large, subsidized state-owned monopolies administratively protected from external competition and oriented toward the CMEA, have not resulted in the parallel creation of new, efficient and progressive ones (Nuti-Portes, 1993, p. 9.). Despite some early successes in increasing exports to the West, restructuring and reorientation have proven much more difficult than previously perceived.
The resultant delicate economic, social and political balance in practically all countries of the region also makes the turn to a rational and pragmatic approach to the economy difficult. There are some seemingly weighty arguments favouring new “grad designs” – instead of the old ones – that would reject the policies of recent years. Some of those who are suggesting, for example, a change to supply side policies of export and investment promotion argue that any meaningful change in strategies can be realized only if the change is radical and explicit.
This author certainly sides with those who think that export-oriented development is absolutely crucial for the small open economies of Central and Eastern Europe. However, given the potentially (or in most cases actually) dangerous disequilibria (foreign debt, budget deficit, and inflation), the present scope for economic policy action is limited, and any radical step toward “introducing“ export-orientation or investment-promotion may run against those limits and prove counter-productive.
As against this, a change from grand designs to more modest and limited aims in actual policy planning may, as a matter of fact, result in gradually turning to another development path, which, in many important respects, will be different from that of the early period of transition. It seems that the failure of shock therapies, the shifting mainstream approach to policy-making, as well as the general reassessment of past polices in view of social discontent and the emerging new political map in Central and Eastern Europe, are making this change a must.
In what follows we will try to support this statement by focusing on some topical issues of stabilisation, growth and reforms in postsocialist countries. This will enable us to present our view on what is wrong with economic transition. Finally, some aspects of the international environment of the region’s – more a liability than an asset for their economic development – will be touched upon.

The paper is available here.