Ten Years of Post-Socialist Transition: Lessons for Policy Reform

Abstract

It is naive to believe that a market economy can be introduced byshock therapy,the author argues. In the several cases when it has been attempted, it has brought problems. A market economy requires adequate institutions and appropriate behavior, both of which can be introduced only gradually because they require new organizations, new laws, and changes in behavior of various economic entities. In 1989 influential financial organizations, political bodies, and professional economists seemed to agree - the so-called Washington consensus - on the main points of economic policy reform. Although the economic policies underlying that consensus were developed with no concern for post-socialist transformation, they have significantly influences economic thought and action in Eastern Europe and the countries of the former Soviet Union. And because those policies were not designed for the overhaul of post-socialist economies. The have failed, especially since they have not yet brought sustainable growth. A new post-Washington consensus is developing. Based on lessons from experience so far. Post-socialist occurrences are also contribution to developing policy reorientation. Among realities policymakers must recognize: A) Above all, appropriate institutional arrangements are needed for growth. B) Institution-building by its very nature must be gradual. C) the size of government is less important that the quality of government policy and how the government changes. D) If the formation of institutions is left to spontaneous forces unleashed by liberalized markets, the vacuum will be filled by informal institutions. E) The judiciary system must be transformed to serve the market economy. F) Deregulating the post-socialist economy requires shifting competence and power from central to local governments. G) The development of nongovernmental organizations must be accelerated. H) Government concern about equitable growth and income policy is important during the transition. I) With the support of international financial institutions, countries must monitor and control short-term capital liberalization. J) The Bretton Woods organizations should reconsider their policies toward transition economies - and should especially provide more support for institution-buildings and equitable growth.