On the Speed of Transition Central Europe

Abstract

Transition i n Central Europe 1.Introduction Transition in Central Europe is four years old.State firms that dominated the economy are struggling with market forces.A new private sector quickly emerged and has taken hold.Unemployment, which did not exist, is high and still increasing.These changes are raising many fears and many questions, to which economists have not yet given answers.Will this process of transition accelerate or slow down?Will unemployment keep increasing?Can things go wrong and how?Our purpose in this paper is to develop a framework to think about those questions, and to-gingerly-use it to have a first pass at the answers.The basic structure of the model we develop is standard, that of the transition from a lowto a high-productivity sector.But we pay attention to two aspects that strike us as especially important.The first is the interaction between unemployment and the decisions of both state and private firms.The second are the idiosyncracies that come from the central planning legacy, from the structure of control within state firms, to the lack of many market institutions, which limits private sector growth.Our paper starts with a description of transition in Poland so far.We choose Poland because we know it best; but, because it started first, this

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