Crossing the Valley of Tears in East European Reform

Abstract

The economic situation in Eastern Europe is mixed and troubling. On one hand, most of countries of region (Bulgaria, Czechoslovakia, Hungary, Poland) are making important progress toward creating a market economy. The results of past two years give strong evidence that these economies can indeed be converted to Western European model in a reasonable period of time. There are hundreds of thousands of new businesses, particularly in construction, trade, and services; shops are full of goods for first time in decades; and inflation is coming under control in almost all countries. On other hand, as result of persistently low living standards and major dislocations caused by reforms, breakdown of old administrative system, and serious external shocks, citizenry of Eastern Europe is troubled, restive, and impatient. Unemployment has risen to around 5-10 percent of labor force in each of countries, and it continues to mount. The fear of unemployment is rising even more rapidly, and that fear could provoke politicians and society to a panicked reponse. The risk of panic brings to mind Roosevelt's aphorism that the only thing we have to fear is fear itself, and underscores fact that it is political management of economic transformation that is single greatest challenge facing region. Will Eastern European countries find their Roosevelts to bring them through this difficult period? Regarding practical reform steps, most of governments have grasped crucial need for stabilization and liberalization of economy. In most of countries as of mid-1991, price controls have been eliminated, currencies are largely convertible for current account transactions, and international trade is quite free. As a result of market-determined prices, shortages have been eliminated. But all of countries have so far failed to make a decisive breakthrough on privatization and financial restructuring of state-enterprise sector. This is no doubt because privatization and financial restructuring pose hardest intellectual and political puzzles of whole transformation.

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