In international conferences during 1990, there was a great deal of optimism about the successful implementation of the transition from plan-to-market and from public-to-private ownership among the former socialist countries of Eastern Europe. At a somew hat later period, perhaps as much as two years later, similar considerations were discussed for the former members of the Soviet Union but without the same degree of optimism. In the case of non-member countries of the Soviet Empire such as the former Yugoslavia, there was less careful analysis of the perilous situation, as the country was into a "Balkanization" process at a fairly early stage.
At the present time, in looking over the situation of the transition countries, it is often remarked that no one ever thought that the change from plan-to-market would be easy, but there is only a certain amount of truth in such claims.
There are different approaches to the measurement of how the economies are functioning and where they are expected to be in the next few years. For some, the number of privatizations is an indicator; for others it is the share in the economy of state ent erpri ses; but for my tastes it would be better to look at such things as inflation rates, unemployment rates, exchange rates, movement of GDP, movement of consumption, trade imbalances, fiscal imbalances, and the flow of imported capital from abroad.
Except in unusual situations (grain purchases in the West in the early 70s, flurries in the oil market, gold sales, dumping of aluminum, and similar restricted economic acts), the socialist countries were not dynamic factors in the world economy. Since 1 990, however, world totals of production, inflation, and labor market indicators have been significantly affected by inclusion of figures reported by former CMEA countries.
Production declines have been very large, inflation rates very high, unemployment rates very high, and deficits (internal or external) very large. Russian production fell to much less than one-half its 1989 levels. This is deeper than the decline that c apitalist countries felt during the Great Depression, when the US GDP fell from $821 (bill, 1987 prices) to $587 (bill, 1989 prices).
The first break in the flow of adverse statistics appeared in 1992 and 1993. The former East Germany showed production increases for 1992 over 1991. Its inflation, which is largely West German inflation, was very modest, but unemployment was very high — and remains a serious socio-economic problem.
The second country to register production gains was Poland. The increment for 1992 is quite small, but much more substantial in 1993 over 1992. The inflation rate in Poland remains high, by Western standards, but it is declining. Unemployment, however, is disappointing — at least to me — because it was pushed aside in early discussions (1990) as not likely to rise to more than 6 or 7 percent. It is now estimated at about 16%. Also the trade balance is negative and does not show signs of a possible qu ick turnaround. To a significant extent, however, Polish data on production understate the actual situation. Border trade with Germany and Russia is not fully reflected, for example. The main positive factor for Poland is that private sector growth is healthy, and firms have longer horizons for stable expansionary planning.
After Poland, the next major economy in Eastern Europe to reverse the decline is the Czech Republic. It is more favorable than otherwise since divesting itself of Slovakia. The inflation rate is quite low, having reached single-digit levels during this year. Last year, production was nearly unchanged in comparison with 1992 and the first substantial increment took place in 1994Q1. (3.5% per year). Unemployment is not a problem in the Czech Republic. It is now at about 3.5% and could rise to levels be tween 4 and 5%, but is expected to hold at a rate below 5%. The increases to come are associated with continuing privatization. Real wages are expected to grow in the near future. The currency is holding its international exchange value, and the curren t account is now in surplus, with foreign reserves growing.
Slovakia has high unemployment, high inflation (both at 2-digit levels) and a continuing decline in real output. There is no doubt that the Czech Republic looks better, in a statistical sense, than could have been expected for the old boundaries of Czech oslovakia.
One of the first countries to liberalize and modernize in the Soviet Empire was Hungary. In spite of the fact that they had a head start on the transition process, they are being held back now by debt and deficit problems. They have large trade and dome stic fiscal deficits but should manage to grow in 1994. Unemployment and inflation will both be on the high side.
In advance of the changes taking place now in Eastern Europe, one would have expected Hungary to have made the most rapid progress and to have slipped easily into the workings of a market economy. Things did not work out that way, and Hungary lags behind both Poland and the Czech Republic. Of course, East Germany had very special circumstances once it entered a unification policy with West Germany. No country in the former socialist group had anything approaching the support that Eastern Germany receiv ed from Western Germany — more than $100 billion, per year, for more than three or four years running. This is a massive transfer and could not help turning the Eastern economy around. It was not, however, managed so as to hold down unemployment.
Bulgaria and Romania have both experienced falling output, rising unemployment, and inflation. Romania seems to be extricating itself from recession by reaching close to single-digit inflation rates and a possible production expansion in 1994. Both coun tries, however, are not capable of matching the three leaders — Poland, the Czech Republic, and Hungary.
Given what has happened in the former Yugoslavia — death, destruction, inhuman behavior — it is hard to believe that any kind of favorable report could be coming from the (barely) surviving states. In Slovenia, however, reforms were introduced at an earl y stage. There is some feeling that the setting up of an independent state at the beginning could have generated similar attempts by other regions in the old Yugoslavia and set the stage for the fighting. Slovenia, however, exploited its trading ties wi th Germany, Austria, and Russia after separation from Yugoslavia and then a livable situation was put into place. Inflation fell from 20% per month to 20% per year. Also, Slovenia did not introduce shock therapy, and is gradually working its way up, eco nomically speaking.
Among the states of the former Soviet Union, the Baltic states separated as soon as possible and are gradually rebuilding their economies. A good deal of help comes from Sweden, Finland and other nearby countries who feel kinship ties. The Baltic countr
ies have every chance of turning towards recovery and expansion, just as Poland, the Czech Republic, and Hungary are doing, but they will probably lag behind and then grow in line with their limited resources.
Russia has further to go in making output adjustments. An end to the slide in production is not foreseen before 1996 or 1997. There is some foreign investment, some international lending, some international assistance, but they need capital funding on t
he scale that went to East Germany. Such transfers are presently out of the question; so the economic troubles — inflation, currency depreciation, weak output, open or disguised unemployment, domestic deficits, external deficits, and a crime-ridden socie
ty — are going to be present for some time
When looking over the situation and prospects in the former socialist countries, I ask myself whether there was any alternative? Many of the architects of policy for this area would argue that there was no visible alternative, that many good things have
occurred that promise better economic times in the future. These architects claim that the gain will be worth the pain. Even in the German case, where the pain is not severe, they would claim that the large amounts spent to realize economic gain have be
en put to good use.
I would prefer to say that the gains are slowly appearing in many countries but were quite mixed in the best cases — Poland, The Czech Republic, and Hungary. But there was an alternative. At the time Gorbachev considered reform (perestroika), he could
have acted decisively. At that time there was an option for step-by-step gradualism. The avoidance of the large drops in output, the disappearance of safety nets, and Yugoslav-type disaster, would have been highly desirable. In a sense, the Chinese str
ategy was available; it was, I am sure, even discussed at mid-decade but never put into place. By 1989, there were fewer options; however, even at such a late date shock-therapy was ill advised. The kind of economy that is emerging from the best situati
ons does not look very attractive from a social viewpoint.