Lessons from Economic Transformation and the Road Forward

Primary purpose of this parer is to comment on the experiences so far by the formerly communist countries in transforming their economies with a view to propose lessons for policy-making. Although my familiarity is greatest with the Polish experience, makes use of the empirical evidence, both economic and political, from the whole area of Central and Eastern Europe and the Former Soviet Union (FSU), particularly Russia. It begins with a few general observations about the choice of reform strategy. This I follow with a discussion of the output collapse and the conduct of macroeconomic policies. The Ten Commandments of Mr Klaus provided further opportunity to comment on policies. Finally, it takes a closer look at Russia and comment briefly on developments in Poland.Economic transformation, Poland

Pension Problems and Reforms in the Czech Republic, Hungary, Poland and Romania

Pension systems and, as ratios of GDP, pension expenditures show large variation among countries. This variation reflects, above all, demographic factors and differences in the level of insurance protection, the latter tending to increase with the level of development. The focus of this paper is pension developments and reforms in the FOUR transition countries: the Czech Republic, Hungary, Poland and Romania, during the 1990s. In terms of key pension statistics, Poland and Romania are clear outliers not just among the FOUR, but also in Europe. The greater pension expenditures in Hungary and, especially, Poland are in part inherited from the socialist system and in part caused by the more radical restructuring reforms which have been adopted since the collapse of that system in 1988-1990. These greater expenditures have prompted these two countries to start replacing gradually their PAYG-DB system with a three-pillar mixed system, in which private pension funds are intended to become a large, eventually the dominant, component. This chapter gives an account of the main aims and principles of the reform measures which came into force in Hungary in 1998 and in Poland in 1999. Also reported are estimates of the public debt implicit in the obligation of the pre-reform state pension system to pay benefits to current pensioners and to current workers. These estimates are found to be, for Hungary, Poland and the Czech Republic, significantly higher than in main European Union countries.Transition, pensions, reforms, enlargement

The Puzzles of Fairly Fast Growth and Rapid Collapse under Socialism

The national statistics and international comparisons based on purchasing power parities suggest that the Former Soviet Union (FSU) in the years 1925-75 and Central and Eastern Europe in the years 1945-80 experienced economic growth comparable to that of many market-based economies of similar levels of development. This must be considered a puzzle given the incentive problems, the absence of proper prices, limited competition and resistance to innovation in economies dominated by a state sector. However, this fairly fast growth came suddenly to a halt in the 1980s. This phase of stagnation and limited reform is now followed not by a recovery, but by a phase of surprisingly deep collapse, indeed in some countries a near disintegration. The paper discusses the three phases with the intention of establishing relationships between them and, in this way, of providing a better understanding of each of the two puzzles.The analysis of development is conducted in terms of standard models of international technology transfer, capital accumulation and catching up. This analysis is informed by the consideration of the distinct characteristics of development under socialism. These characteristics relate in part to preferences of the central authorities, embodied in the so-called communist strategy of industrialization, and in part to the implications for innovation and development of the socialist economic system. The standard view of the socialist development was that the short-term interests were sacrificed for the benefit of future generations. The paper aruges that this was true only in the initial phase of development. In the later phase the authorities had switched to an opposite policy, one of sustaining a reasonable pace of improvement for the current generation under an inefficient system at the expense of future generations. The collapse phase came with the exhaustion of the growth reserves offered by the policy. The intergeneration terms of exchange have switched once more, again to work against the interests of the current generation. The paper also discusses the particular causes of the collapse and the prospects of a revival after the transition to a market-based system is advanced.Socialism, Economic growth

The IMF-Supported Programs of Poland and Russia, 1990-1994: Principles, Errors and Results

The paper discusses four IMF-supported adjustment programs of Poland, 1990-1995, and two of Russia, 1992-1994, in terms of the underlying theory, policy objectives, assumptions, policies, errors and results. The paper suggests that the roles of the IMF and the World Bank have been helpful but, compared to the influence of domestic factors and local refomers, relatively modest. Transition-related features of the programs are the focus of the analysis. The specific topics include the choice of nominal anchors, the speed of disinflation, the choice of performance criteria, and the role of foreign economic assistance. The primary objective of this paper is to discuss the IMF-supported adjustment programs of Poland and Russia in terms of the underlying theory, policy objectives, explicit and implicit assumptions, proposed policies, major errors in assumptions and policies, and actual results. Throughout this discussion, the intention is to identify the influence of systemic features and transition circumstances. The analysis suggests that the roles of the IMF and the World Bank have been helpful but, compared to the influence of domestic factors and local reforms, relatively modest. Part I of the paper provides a discussion of the broad policy objectives, common and separate, of the authorities of Poland, Russia and the two Bretton Woods Institutions, the IMF and the World Bank. Part II outlines the theory underlying the standard IMF adjustment programs. Part III collects and discusses what according to this author have been the major errors in assumptions and policies. The aim is to identify the origins and the implications of those errors. Part IV provides an analysis of the actual adjustment programs. The major feature of this analysis is the discussion of aims and results of the various programs. Finally, Part V addresses the issue of the role of foreign financial assistance in transition economies.Poland, Russia, IMF, World Bank

The Financial Situation of Polish Enterprises 1992-93 and its Impact on Monetary and Fiscal Policies

This is the first detailed study of enterprise finances in a country of Central and Eastern Europe during transition. It is based on enterprise data collected monthly by the Polish Central Statistical Office. Its primary purpose is to provide answers to questions about the size of enterprise debt, particularly bad debt, to banks, other enterprises, and the government; about its distributions by sector of activity and type of ownership; and about its evolution over time. The central findings are, firstly, that the bad debt is a large proportion of total debt, both to banks and enterprises, and, secondly, that it is highly concentrated. The study identifies enterprises, in terms of sales (and possibly employment) representing about a tenth of the whole enterprise sector, whose debt in relation to the total income of these enterprises is particularly large. In terms of financial situation and the softness of the budget constraint, these enterprises have been (and are) distinctly different than most other enterprises, forming effectively a 'black hole' of the economy. The Polish enterprise sector has thus been found to have, in 1992-3, a heavily pronounced dual structure: about 90% of it is almost debt-free while about 10% of it has accumulated large debts to banks, the government and other enterprises. The paper also discusses the implications of these findings for the conduct of fiscal and monetary policies of the central authorities and for the lending policy of commercial banks.Polish enterprises, 1992, 1993, monetary policy, fiscal policy

A simple model of the transformational recession under a limited mobility constraint

This paper considers the impact on sectoral outputs and employments of rapid and large changes in relative prices, such as those which occurred in transition economies during the 1990s. A simple general equilibrium model is developed in which price changes are induced by a tax reform and resource mobility is restricted. The reform is designed to improve the quality of the price system, but is shown to cause a recession the size of which is proportional to the initial tax distortion. It is also demonstrated that a wage flexibility would moderate the magnitude of the recession, but this gain would be obtained at a cost in longer term efficiency, and would be, in any case, unsustainable

Technical Progress and Long-Run Growth

The types of technical progress referred to in the theory of economic growth are passed in review and their relations studied in detail. Light is also shed on the dependence of the long-run rate of growth, in the presence of a constant rate of saving, on the type of technical progress taking place in the economy, both in the most general case and in that of an aggregate C.E.S. production function; what happens in this respect in the case when technical progress is Harrod neutral is well known, the same cannot be said of the case when technical progress is not Harrod neutral.economic growth, technical progress classifications, long-run growth, neoclassical growth model

Estimating the Impact of the 1999 Pension Reform in Poland, 2000 - 2050

This paper gives an account of the main aims and principles of the reform measures which came into force in 1999. Its primary objective is to present estimations of the effects of these measures on the composition of the pension system, over the next 50 years, in terms of institutions, expenditures and revenues. Within the segment of retirement pensions outside agriculture, the 1999 reform is found capable of achieving its key objectives concerning work incentives, total spending and aggregate savings. However, invalidity and family pensions for all and retirement pensions for farmers represent three segments which are yet to be properly reformed. The paper concludes that the 1999 reform should arrest a further deterioration of public sector finances with respect to pensions, but any reduction of Poland's exceptionally large both public spending on pensions and social security contributions is contingent on adopting radical reforms also in these three segments.pension reform, Poland

A Simple Model of the Transformational Recession Under a Limited Mobility Constraint

This paper considers the impact on sectoral outputs and employments of rapid and large changes in relative prices, such as those which occurred in transition economies during the 1990s. A simple general equilibrium model is developed in which price changes are induced by a tax reform and resource mobility is restricted. The reform is designed to improve the quality of the price system, but is shown to cause a recession the size of which is proportional to the initial tax distortion. It is also demonstrated that a wage flexibility would moderate the magnitude of the recession, but this gain would be obtained at a cost in longer term efficiency, and would be, in any case, unsustainable.Output falls, Central Europe, Former Soviet Union, contractionary impact, relative prices, transition economies