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I would like to thank Mohsin Khan and Peter Wickham for useful comments. I also thank Catherine Fleck for editorial assistance. The views expressed in this paper are the sole responsibility of the author.
The set of PCPEs of Eastern Europe whose reforms are discussed in this paper comprises: Bulgaria, the former Czech and Slovak Federal Republic, Hungary, Poland, and Romania.
Moreover, in countries with larger disequilibria, financial discipline in government agencies tended to break down to a greater extent.
See Borensztein, Demekas and Ostry (1992). The main thrust of the econometric work is a decomposition of the changes in the output of 14 industrial sectors between common macroeconomic factors and industry-specific factors.
But, as the literature on “irreversible investment” has emphasized, reallocation of fixed capital to alternative activities may not be possible in most cases. The same would apply to specific knowledge that is embedded in the stock of human capital.
Note that this is equivalent to saying that the PCPEs of Eastern Europe are endowed with abundant and cheap labor, which is a statement often shared by observers.
These rates of growth are based on the assumption that the PCPEs achieve a level of economic efficiency similar to the average of non-centrally planned economies.
The impending breakup of the country did not interfere with the first “wave” of mass privatization. After the breakup, however, only the Czech Republic will continue the execution of the mass privatization program.
See Luders (1990). Later, a second wave of privatization took place that provided a much more solid financial footing for enterprises and which is now considered a prime example of successful privatization.
One could speculate that this could trigger a removal of managers by shareholders, but such an option is always available to dissatisfied shareholders.
Under a new law, the number of bankruptcy proceedings initiated in Hungary has risen considerably in 1992.
There is a moral hazard problem, however, in the intervening period between the announcement of the debt write-downs and the consummation of privatization, but it should not be hard to find ways to counteract this effect.