Although key to the reform process in Central and Eastern Europe, large-scale privatization cannot be undertaken all at once. This paper analyzes the allocative efficiency implications of alternate sequences of privatization in a reforming planned economy with two sectors—an input-producing upstream sector and a final goods-producing downstream sector. The model focuses on the link, through an intermediate inputs market, between the two sectors. The impacts of exogenous shocks are highlighted to show how the inflexibility of public firms in responding to shocks constrains the production response of private firms operating in perfectly and imperfectly competitive markets.
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This study, another in the series focusing on special issues in transition, reviews the experience of output decline and recovery in the 25 countries of eastern and central Europe and the Baltics, Russia, and other countries of the former Soviet Union. Although these countries began the process of economic transformation with similar circumstances of output decline, the extent of decline, its duration, and the sustainability of recovery in growth varied considerably. The authors explore the factors behind this variation and find that the most important policies promoting early and sustained recovery were ones that supported financial stabilization and structural reforms in key areas such as private sector development, the tax system, economic liberalization, and secure property rights.
In December 1989, with the fall of Nicolae Ceausescu, Romania reached a turning point in its history. The provisional Government that took over announced immediately a sharp and permanent break with the past, both political and economic. With respect to the latter, Romania was to abandon the central planning model under which it had operated since the late 1940s, and was to move as rapidly as possible to establish an economic system in which private sector activities would be given maximum scope and market forces would play the predominant role in economic decision making and resource allocation.
The transition from predominantly socialist ownership and central planning to a market economy with private ownership is a complex process involving profound changes in the political, economic, institutional, legal, and social domains. While there may not be a simple unifying theme to capture this complexity, the quest for economic recovery and sustained growth is certainly an important common thread for all the transition countries. This paper reviews the record of growth performance in 25 countries, comprising central and eastern Europe (CEE) and the Baltics, Russia, and other countries of the former Soviet Union (BRO).
A revival of interest in economic growth in the mid-1980s led to the development of a new wave of models that established a synthesis now known as endogenous growth theory, which has produced a large volume of empirical studies of growth. The first element of this synthesis is the earlier prevailing doctrine on economic growth, the “neoclassical” model of Solow-Swan and Cass-Koopmans from the 1950–60s, which attributed growth to the expansion of capital and labor, augmented by exogenous technological progress. Simple factor input and factor productivity calculations of the sources of growth are based on this paradigm and continue to be used widely, including in many IMF background studies.
To clarify what the reform program is trying to achieve and the obstacles it faces, this section describes the main aspects of the centrally planned system in Romania and its development in the 1970s and 1980s.1 It covers first the developments in the economy from the early days through the 1970s, and then focuses on the 1980s.
The 25 countries of CEE and the BRO4 have been undergoing a process of transition from a centrally planned to a market-oriented economy for the better part of a decade. While this transition has been dependenl in all cases on major changes in the political system, particularly during 1989–91, there have been considerable differences across countries in the speed with which the old system of planning has been dismantled and market-oriented reforms have been introduced. In a few countries, such as Hungary and Poland, a number of market-oriented reforms were well under way long before 1989, and in the former Socialist Federal Republic of Yugoslavia a relatively high degree of market liberalization had existed for some time. In some countries, such as Belarus, Turkmenistan, and Uzbekistan, comprehensive market-oriented reforms have hardly yet begun.
Against a background of economic, institutional, and social crisis in Romania, a coherent reform strategy gradually emerged. This section examines the overall design of the reform program, and, in particular, how the reform strategy evolved.
Romania showed progress in stabilization and reform, facilitated by substantial fiscal and external adjustments, under the Stand-By Arrangement. Executive Directors commended these developments, and emphasized the need to improve fiscal and monetary policies, and accelerate structural reforms. Directors appreciated the authorities' commitment to accelerate European Union accession, and stressed the need for fiscal consolidation, financial discipline in state-owned enterprises, and rapid privatization for reducing inflation and protecting external sustainability. They urged the authorities for the full implementation of the economic program, and approved a Stand-By Arrangement.