ASSESSING THE TRANSITION FROM PLAN TO MARKET: WHAT HAVE WE LEARNED—ABOUT POLICIES AND ECONOMIC THEORY?

Abstract

The World Bank's 1996 World Development Report focuses on the transition from plan to market in 28 countries, including those in Central and Eastern Europe, the former Soviet Union, Mongolia, China and Vietnam. Experience differs a great deal between countries; also between individuals in countries. Many issues have been hotly debated. For example, should reforms be fast or slow? How important are reform policies relative to initial conditions? Is privatization really vital, and does it matter how it is done? How can countries build institutions to support efficient market systems? In these and other areas, the experience of the transition countries can inform the development debate. In particular, it draws attention to the need to consider policy alternatives realistically and against each other, rather than simply against 'ideal' solutions. Despite many initial surprises, the experience of transition countries strongly confirms the power of economic reforms to reshape the economy, even in countries where the foundations of market systems are weak. However, reforms have to be broad enough to change behaviour, and to sustain the change over a period of time. The 'big bang' versus 'gradual' debate misses the main point. Reform credibility is particularly important, because of moral hazard and, in the longer run, the cost of uncertainty. Further, three types of initial conditions are important in understanding the trade-off between fast and slow reforms, and also the response of economics to reforms: economic structure, initial macroeconomic imbalance, and the dynamics of political change. Clear property rights are important. Yet privatization is more urgent in some countries than others, depending on the degree of structural reallocation, and also on the ability of governments to exert control over state property and rents. Transition countries proceed through distinct stages in terms of competition for rents and its effect on the economy. Supply-side measures to create institutions are important. Yet, equally important is ensuring demand for institutions, through appropriate economic policies. Finally, the outstanding reform agenda for the countries, and the implications for foreign assistance will be discussed. © 1997 by John Wiley & Sons, Ltd.