Front Matter Page
Research Department
Table of Contents
I. Introduction
II. Where to Go and How to Get There
III. Criteria for Evaluating Alternative Sequencing Strategies
1. Distortions and second-best analysis
2. Adjustment costs
3. Income distribution and equity considerations
4. Credible, irreversible, and robust reforms
5. Lessons from the literature
IV. Reforms in the Socialist Economies of Eastern Europe
1. If it is broken, fix it!
a. Excess demand and shortage
b. Price distortions
c. Low productivity
d. Inadequate institutional infrastructure
2. Major issues in the design of reforms
a. Stabilization vs. reform, a chicken-and-the-egg problem?
b. Price reform and currency convertibility
c. Privatization vs. decentralization
d. Financial reform
e. “Big bang” vs. gradualism
V. Examples of Comprehensive Reform Sequences
1. Three examples from the recent literature
2. A case for broad-based and rapid reforms
VI. Concluding Remarks
Figure 1: Proposal by Fischer and Gelb
Figure 2: Proposal by Hinds
Figure 3: Proposal by Nuti
Bibliography
Summary
Transforming Eastern European economies into market economies requires unprecedented reforms. After identifying the main features of these reforms, this paper analyses their sequencing, that is, whether an optimal ordering of their introduction can be discerned.
A clear statement about the intended end results of the reforms is indispensable for their success and to smooth the transition path. Not only do the final objectives of the reforms condition the nature of the required policies, but also private sector responses are more likely to reinforce government action if the ultimate objectives of the reforms are clearly understood.
The various aspects of the reforms are interdependent. Issues of macroeconomic stabilization, for instance, are not easily distinguished from structural reforms, nor is it always correct to propose, as is common in the context of developing countries, that the former should precede the latter. Similarly, price reform is ultimately linked to currency convertibility, and problems associated with privatization, decentralization, and enterprise management are interrelated.
This interdependence implies that a reform strategy should be as broadly based as possible. At a minimum, the first phase of a reform package should contain measures to achieve macroeconomic stabilization by removing open-ended subsidies to enterprises, price reform by introducing external convertibility to make the economy more competitive, and rapid but prudent privatization of state enterprises.
The paper also gives a number of reasons for preferring a rapid to a more gradual reform process. Finally, it recommends that in the early phase of the reforms a social safety net should be established to defuse opposition to the reforms.