A popular criticism of the reform process in a number of Eastern European countries is that the decision to implement reforms relatively quickly was responsible for a larger-than-necessary initial decline in output. This view is based on the assumption that the massive relative price shock associated with price and trade liberalization set in train a process of resource reallocation which, in the short run, caused output to decline. According to this view, therefore, a slower pace of price and trade liberalization would have reduced the short-run output costs of the reforms by mitigating the transitional output losses associated with reallocating resources across sectors.
This paper examines whether it is reasonable to conclude that a significant fraction of the initial declines in output in four Eastern European countries (the former East Germany, the former Czechoslovakia, Hungary and Poland) is attributable to structural change. A methodology is presented which decomposes the total decline in output in the first two years following the implementation of reforms into a portion associated with resource reallocation across different industrial sectors (structural change), and a portion due to macroeconomic forces (factors common to all sectors within a country). The paper’s finding is that most of the initial decline in output in the region reflects macroeconomic rather than structural factors.
Notwithstanding a number of caveats discussed in the paper, our results suggest that proposals to slow down the pace of reform in other economies in transition on the grounds that “going slower” would reduce short-run output costs lack empirical support. In fact, since all the economies in the region will ultimately have to undergo the structural adjustment associated with their decision to become market economies, it is not difficult to make the case that moving more quickly to implement reforms (particularly as regards corporate governance and the imposition of harder budget constraints) would have resulted in a faster resumption of growth than occurred under alternative, more gradualist, strategies. To the extent that political support for the reform process depends on a timely resumption of growth in these countries, the results presented in this paper suggest that a rapid implementation of structural and stabilization measures is less likely to jeopardize the transition to a market economy than more gradualist alternatives.