Between 1992 and 1997, most of the transition countries succeeded in getting inflation under control without evident cost in terms of lost output. An understanding of the factors behind their success could not only shed light on the transition process but also yield lessons for other countries seeking to tame inflation.
WHEN the centrally planned economies began to transform themselves into market economies in the early 1990s, inflation spiked in the context of loose macroeconomic policies and removal of price controls. In 1992, the median inflation rate was nearly 100 percent in the Central and Eastern European countries, and well over 1,000 percent and rising in the Baltics, Russia, and other countries of the former Soviet Union. By 1997, the median inflation rate in both areas had fallen to 11 percent.
Most of the transition countries achieved inflation rates below 60 percent remarkably quickly—within six months of taking anti-inflationary measures. In Croatia and Georgia, inflation rates fell even more rapidly, although in other countries—including Estonia and Ukraine—this initial reduction of inflation took considerably longer.
Although the drop to 60 percent was rapid in most countries, further declines happened more slowly in several countries. For example, inflation persisted at moderate to high levels (between 15 and 60 percent) for more than two years in the advanced reformers—the Baltic countries and the larger countries of Central Europe. One year after inflation had fallen below 60 percent, the median inflation rate in these countries was still roughly 30 percent; five years later, it had fallen to 15 percent. Nonetheless, with a few exceptions—notably, Albania, Bulgaria, and Romania—the transition countries did not see a resurgence of high inflation during 1992–97. (At the end of 1995, inflation rates had fallen to 6 percent in Albania and to 35 percent in Bulgaria and Romania; two years later, they had climbed to 40 percent in Albania, 580 percent in Bulgaria, and 150 percent in Romania.)