Four years after the fall of the Berlin Wall, most countries in central Europe and the former Soviet Union have made irreversible progress toward transforming their formerly planned economies into market-based economies. In central Europe, the collapse of output that followed the onset of the transition is bottoming out, and in some countries activity has started to expand. Further structural reform and additional stabilization efforts will be required to consolidate gains already made and to sustain advances in the years ahead. Sweeping structural reforms are also being implemented in the countries of the former Soviet Union. With some exceptions, however, inflation and government budget deficits remain far too high, and the outlook is for further significant output declines in the near term. Accumulating evidence suggests that controlling credit creation, fiscal deficits, and inflation yields economic benefits. Output declines have been severe even in those countries that have followed inflationary policies, whereas countries—notably Albania, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and Slovenia—that have pursued appropriate macroeconomic policies appear to be among the first to be experiencing renewed economic growth.
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