The economic impact of new firms in post-socialist countries: Bottom up transformation in Eastern Europe: A review article

Abstract

Just as the title suggests, the message of this book edited by Horst Brezinski and Michael Fritsch is that bottom up transformation, that is the formation of new small firms, is the key to successful economic transformation in Eastern Europe. The book is a collection of papers which were presented at a conference in Freiberg, Germany, in September, 1993. The discussion ranges from "Who are the new entrepreneurs?" to "How can government policy encourage the formation of new firms?" This book sets itself apart from most books on transformation policy1 in that it is aimed at micro policies rather than macroeconomic policies, such as those advocated by David Lipton and Jeffery Sachs (1992). Some chapters do indeed touch upon macroeconomic issues, but most of them just give us the by now familiar run-down of what is needed for macro stability. One exception is the issue of using the exchange rate as a policy instrument. The Polish example has been used to emphasize the importance of not undervaluing a currency.2 Keren uses the extreme example of East Germany to stress the importance of not overvaluing the currency. Most policy advice, however, is limited to mircoeconomic policies aimed at encouraging newly established firms. Some of the underlying themes throughout the book are well-known in the literature, namely: the need for clarity in property rights, clear accounting procedures, fair and enforceable tax laws, and a developed banking sector. One newer issue that has recently received extensive attention in the popular press is the flourishing number of Mafia and black market transactions. Although it is agreed upon that rent-seeking activities and the general lawlessness of these groups wastes resources and does not promote economic efficiency, it is the opinion of many of the contributing authors that it is better to have these "bad" entrepreneurs than to have none at all. The "good" ones will come sooner or later. When we look at the development of many Western market economies, they are not without numerous important economic actors operating on the dark side of the law. This is not a perfect comparison, and some may argue that we should be able to avoid these "bad" entrepreneurs, but their contribution to the marketization process cannot be ignored. No cost-benefit analysis has been done to determine whether these dubious businesspeople do more harm than good, but the point is that they are not all bad, economically speaking. Despite the rework of well-known topics, this book is more focused than previous books dealing with economic transformation in Eastern Europe. Themes like Big Bang vs. Gradualism and order of reforms are not addressed at any length. The needs of entrepreneurs and the trials and tribulations of new firms in the transforming economies are the central themes of all the chapters, the Ners chapter being the exception.3 In addition, the mere fact that a few years have passed since reforms Final version receiveded on February 25, 1994