The Main Problems which Eastern/Central European Countries Have - Essay Example

Discuss the main problems which Eastern/Central European countries have encountered in the of economic transition from centrally planned to market economy The collapse of the Soviet Union in 1991 had serious repercussions for countries in Eastern and Central Europe. For many years these countries had been under the influence of Soviet economy. Under communism economic activity was centrally planned but now there were being forced to change to market economy over-night. To understand the challenges of transition in Eastern and Central Europe one has to understand that it is difficult to treat such a diverse set of countries with one brush. There are three categories of countries and they had different challenges. The first category are those countries that composed the Soviet Union. These are countries such as Russia, Ukraine, Baltic Republics, Belarus, Georgia, Kazakhstan, etc. These former Soviet Union (FSU) countries had the biggest challenge. The FSU countries had all been centrally controlled from Moscow. The removal of that control left them with a vacuum at the top. Camdessus (1994) observes that “the old structures of planning and control were disintegrating, creating conditions of economic and political crisis.” They had to build administrative capacity and also take control of companies that were also controlled from Moscow. The challenge these countries faced was of a political transition from communism to democracy which was happening at the same time with economic transition. Their first challenge was to have a currency of their own and start formulating their monetary and fiscal policies. The currency had to be stabilized and be made convertible. They inherited weak inefficient industries surviving on subsidies. It was important to ensure that while price controls are removed inflation does not get out of hand. Programs to revive industrial production had to be in place to ensure that the economy would begin to function. Inevitably inflation soared in all these countries due to collapse of production and lack of resources to import commodities. Unemployment increased exacerbating an already grave situation. Social welfare funding was a problem as more and more became unemployed. Indeed most of these countries were faced with a popular backlash as people were seeing their conditions deteriorating to conditions worse than before collapse of communism. The instability of Russia was a great cause for concern. First these economies were deeply tied to Russia economically. Secondly the Red Army was always a threat to reverse the changes. The second category are the Central European countries which cover Poland, Hungary, Romania, Bulgaria, Czech Republic and Slovakia. These countries although under influence of the Soviet Union had autonomy to a degree. In theory they had functioning government structures and parastatal organizations. In reality these structures were subservient to the Red Army control. In fact Blunden (1993) asserts that the “Red Army was the state.....[in t]hese countries… [and] ….[t]heir governments were in reality the local administrative apparatuses of the Red Army.” Their immediate challenge was to transform politically into democracies and embark on economic reforms that removed government intervention with market forces. The major challenge for these countries was the nationality question. Suppressed minorities seized this opportunity for self-determination. The Czech and the Slovaks in Czechoslovakia parted company. There was a bloody revolution in Romania. Most of these countries traded with the USSR and the break-up of USSR destroyed their major markets. For instance Paci, Sasin and Verbeek (2004) point out that “[t]he loss of export markets in the East as a consequence of the Russian crisis in 1998 costs Poland around 3 percentage points of GDP.” For a time barter deals were in place but these were not sustainable. What they needed was hard currency to purchase inputs for their own industry. As a result they had to turn their eyes to Western Europe and rest of the world for markets for their exports. Due to their being involved in protected markets their goods were not of the right quality to compete in open markets of the West. The absence of competition culture under communism meant that they did not have the skills to compete in a globalizing world. Their industry was crumbling. Inflation was the bane of these countries. Price controls were no longer sustainable and most of these countries moved to remove price controls. Inflation skyrocketed driving many people to indigence. Budget deficit was another area which challenged these nations. The third group of countries are the Balkan countries that emerged from the break-up of Yugoslavia and Albania. Yugoslavia broke up violently along ethnic lines. The challenge of these countries was to draw their boundaries and achieve legitimate sovereignty. They had to build governments from scratch, introduce currency and raise the army and police to protect their borders. The internecine conflict in these new republics resulted in widespread displacement of people and destruction of infrastructure. Industrial output shrank drastically and inflation soared. The challenge for these countries was to stabilize economy and gain investor confidence. Restoring confidence in the country was a major concern as noted here by Vaknin (2001): “As a result of a multi-annual spiral of mega devaluations followed by hyperinflation, Serbias currency, the dinar, is distrusted by everyone.” Vaknin reports widespread distrust of banks in Serbia due to rampant corruption. Banks are a necessary part for reforming a nation’s financial system. It should also be noted that reform programs in these countries were driven by the so-called “Washington Consensus” of IMF, World Band and Treasury Department. Theirs was a political agenda to ensure that communism never emerges again. As a result they advocated radical approach to transition the so-called “Big Bang” approach. They were afraid that gradual reforms could be stalled and thereby give opportunity to reactionary communist forces to win popular support from a population reeling under impact of reforms. Their robust approach created a lot of problems for ordinary people and put transition governments under severe pressure. Communism had engendered rampant corruption. Olson (1995) observed that: The collapse of communism has generated another big surprise that the experiences of developed nations of the West, whether they had been winners or losers in World War II, gave us no reason to anticipate: an extraordinary amount of official corruption and Mafia-style crime. This corruption was a challenge to the newly democratized states. They did not have the resource to tackle it because it was widespread and in unstable conditions most people tend to resort to breaking the law. In most of these countries there was a massive black market underground. As the nations were planning to woe foreign investors corruption was a major dis-incentive. The administration of aid by American and European agencies was also tainted by corruption. Wedel (1999) points out that the aid agencies tended to shun all people who had worked for communist governments and pick people of dubious ethical standards in each country to administer the aid. “Money was not spent as designated. Donors paid hundreds of thousands of dollars for nothing . . . for something you can’t determine.” (Wedel, 1999)1. An army of consultants descended on Eastern Europe with dubious credentials and they in effect usurped the central control which was formerly held by the communist parties and started to dictate reforms. They pushed their half-backed reforms down the throats of host countries causing serious destabilisation in the process. Wedel quotes an interview with Coles a key American official in charge of privatization in Russia where he acknowledges lack of support for reform measures and says, “There was no way that reformers could go to the Duma for large amounts of money to move along reform.” (Wedel, 1999). As a result they opted to bypass the elected Duma and use decrees to push their policies. This was a challenge for countries who while expecting their new advisors from the West to help them strengthen democracy see them turn out to prefer autocratic methods. This created a backlash resulting in the Socialists regaining power in some countries. The carrot of joining the European Union was another challenge for these countries. This came with stringent requirements in terms of a stable macro-economic environment with low inflation and fiscal discipline. The countries were encouraged to privatise public enterprises. The challenge was that some of these enterprises were already crumbling. It was difficult to get foreign companies that were interested in these companies. The meddling of the consultant brigade mentioned by Wedel (1999) made the process even more difficult. In the end companies and governments decided to bypass the privatisation consultants. “What happened in many Central and Eastern European enterprises serves to drive home the point that privatisation aid appeared almost uniformly to yield few favorable results.” (Wedel, 1999)2. The globalisation forces were staked against these countries in this time of transition. This is the time when globalisation was increasing competition in many markets while these countries were not yet prepared. The earlier 90s coincided with a period when commodity prices were tumbling. This effectively reduced income form trading commodities on the international markets. In conclusion we see that these countries faced different pressures but most of them have emerged stronger. By the turn of the century most of them had started to experience positive GDP growth and employment levels were begin to rise. The Western countries could have done more to cushion the trauma of the changes but in the end it was a necessary but bitter medicine. References Blunden, A. (1993) Stalinism: Its Origin and Future [Online]. Available at: http://home.mira.net/~andy/bs/bs4-1a.htm#4-0 [Accessed on 9 January 9, 2006] Camdessus, M. (1994) Supporting Transition in Central and Eastern Europe An Assessment and Lessons from the IMFs Five Years Experience Second Annual Francisco Fernández Ordóñez Address [Online]. Available at: http://www.imf.org/external/np/sec/mds/1995/mds9502.htm Olson, M (1995) Why the transition from communism is so difficult Eastern Economic Journal, Fall 1995 [Online]. Available at: http://www.findarticles.com/p/articles/mi_qa3620/is_199510/ai_n8717464 [Accessed January 9, 2006] Paci, P., Sasin, M.J. and Verbeek J. (2004) Economic Growth, Income Distribution And Poverty In Poland During Transition, World Bank Policy Research Working Paper 3467, December 2004, 1-18. [Online] . http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2005/01/19/000160016_20050119122932/Rendered/PDF/WPS3467.pdf Vaknin, S. (2001) New Serbias Old Economy [Online]. Available at: http://www.ce-review.org/01/21/vaknin21.html [Accessed January 9, 2006] Wedel, J.R. (1999) U.S. Assistance For Market Reforms Foreign Aid Failures in Russia and the Former Soviet Bloc, Policy Analysis No. 338 March 22, 1999, 1-20. [Online]. Available at: http://www.cato.org/pubs/pas/pa338.pdf [Accessed January 9, 2006] Bibliography Fidrmuc, J. (2001).Economic Reform, Democracy and Growth during postcommunist Transition* Working Paper No. 372 March 2001, 1-39 Shiells, C.R., Pani, M., and Jafarov, E. (2005) Is Russia Still Driving Regional Economic Growth?, IMF Working Paper WP/05/192, 1-42 World Bank. (1991) Bulgaria Crisis and Transition to a Market Economy, World Bank Country Study, Vol.1, 9833, 1-222 Read More