The latest in a series of papers published by the International Monetary Fund on economies in transition examines the experience of disinflation in Central and Eastern Europe, the Baltics, Russia, and other countries of the former Soviet Union between 1993 and 1997. The paper reviews the economic policies underlying the dramatic drop in inflation during those years as well as other variables that facilitated the disinflation and notes that the adjustment of fiscal fundamentals as the driving force behind the disinflation, while nominal anchoring arrangements played a less prominent role. This was contrary to developments in countries, for example, in Latin America, that had experienced high inflation for a long period of time.
Almost all transition countries experienced an initial spike in inflation at the outset of the reform process as price controls were removed. The speed of the subsequent disinflations, however, varied markedly, partly reflecting the different times when countries gained monetary and political independence. Some Central and Eastern European (CEE) countries had managed to reduce inflation to the two-digit range already by the end of 1992, while inflation remained close to or above 1,000 percent in the Baltics, Russia, and other countries of the former Soviet Union (BRO). Subsequently, inflation continued to fall gradually in the Central and Eastern European countries, albeit with some notable exceptions. But it fell sharply in the Baltics, Russia, and other countries of the former Soviet Union, where, by the end of 1997, it exceeded 100 percent only in one country. As a result, median 12-month inflation in the whole transition group fell from 950 percent at the end of 1992 to 11 percent at the end of 1997.
By the end of 1992, major results in stabilizing inflation had been achieved only in the Central and Eastern European countries: inflation had dropped below 60 percent in the Czech Republic, Poland, and Slovak Republic (Table 1).2 Hungary had always remained well below this threshold.3 Inflation in the ruble zone was high and rising at this time. It surged dramatically in many countries that exited the ruble zone and established independent currencies and new central banks thereafter.
The speed of disinflation and the apparent resilience of output in that context are remarkable features of transition economies' disinflation experience, and they are evident in the stabilizations of cases of extreme and more moderate inflation.
Having stabilized inflation rapidly and credibly, a number of advanced transition countries appear to have got stuck with moderate inflation in the 10–30 percent range (see Table 1, Section II, and Figure 4). The Czech Republic and Slovenia have spent 3–4 years in the high single-digit range. The Baltic States have only recently come down to those levels from the 20–40 percent range in 1993–95. Hungary has hovered in the 20–30 percent range throughout transition, until 1998, when it began disinflating into the lower teens from there. And Poland, after its rapid disinflation in 1990–91, has taken six years to get to the low teens. This section considers the factors underlying the slow progress after the initial dramatic successes.
The reduction in inflation since the early 1990s right across the transition area is remarkable, particularly given the chaotic conditions at the outset. Inflationary pressures that had long been suppressed by price controls turned out to be one of the lesser challenges, as nascent policymaking institutions wrestled with collapsing output, employment, and fiscal revenues, as well as military conflicts and redrawn national boundaries. In such conditions, most currencies, new and old, collapsed, and inflation surged. But these difficulties notwithstanding, disinflation has been achieved throughout the region. Once undertaken, it was swift and there is no systematic evidence that it compounded output losses. Furthermore, major resurgences of inflation have been the exception. And in this lower inflation environment, growth has resumed, with formal evidence suggesting a direct link between reduced inflation and the resumption of growth.