Economic liberalization in Eastern Europe allows access to a superior foreign technology. The initial adoption of the new technology is limited by the adaptability of current Eastern productive inputs to Western technologies. Further adoption is limited by the rate of Eastern investment in suitable inputs. Both the immediate amount and the continuing flow of adoption can be increased if capital is available from Western sources. Privatization that takes the form of a forced transfer of assets to the advanced sector is not necessarily desirable if all assets are not fully transferable. If the initial Eastern capital/labor ratio is high enough, it is desirable to allocate some of the new entrants in the labor force into the state-supported backward sector even as all new capital investment is placed in the advanced sector. Generally the East should concentrate its product mix on the capital-intensive products using the backward technology and the labor-intensive products using the advanced technology. If privatization is the only option, it is better to privatize the labor-intensive sector, or more accurately the sector that uses intensely those inputs that are most readily transferable to the advanced technology. Because of the preservation of the capital-intensive state-supported sector, the East may initially export the capital-intensive products made with the backward technology. Over time, with capital accumulation and depreciation, the product mix and the trade mix will shift in favor of the labor-intensive product made with the advanced technology.
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Paper provided by Institute for Advanced Studies in its series East European Series with number
12.