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The Output Decline in Central and Eastern Europe: A Classical Explanation


  • Bofinger, Peter


The paper discusses the strong output decline in the countries of Central and Eastern Europe. It starts from the puzzling observation that the former CSFR, Hungary and Poland experienced a relatively similar decline in output in spite of completely different stabilization and transformation policies. Using an aggregate supply/demand (AS/AD) framework it can be shown that there are obvious `real' causes for an output drop. The command economy was characterized by a dual disequilibrium (labour market and goods market). The removal of the high excess employment leads to an inevitable drop of natural output and employment together with a reduction of real wages. This is amplified by a downward shift of the production function, mainly because of lack of corporate governance. With very flexible nominal wages, the transitional economy can be represented by the `classical' version of the AS/AD model, which suggests that the theoretical basis for demand-side explanations is rather weak. This supply-side view is compatible with the popular explanation given by Calvo and Coricelli, but their evidence for a `credit crunch' in Poland is not very strong. The paper also discusses the `Soviet trade shock' as a possible cause for the output drop. It shows that Hungary and Poland -- and to some extent the CSFR -- were able to compensate their loss of CMEA exports by expanding their exports to the West, so that an overall trade shock cannot be observed. The `classical' explanation of the output decline rules out policies stimulating demand. What is required is a framework enhancing the transfer of resources from state-owned enterprises to the emerging private sector.

Suggested Citation

  • Bofinger, Peter, 1993. "The Output Decline in Central and Eastern Europe: A Classical Explanation," CEPR Discussion Papers 784, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:784

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    Cited by:

    1. Johan F. M. Swinnen & Liesbeth Dries & Karen Macours, 2005. "Transition and agricultural labor," Agricultural Economics, International Association of Agricultural Economists, vol. 32(1), pages 15-34, January.
    2. Olivier Bouin & Irena Grosfeld, 1995. "Crédibilité des réformes et ajustement des entreprises en Pologne et en République tchèque," Revue Économique, Programme National Persée, vol. 46(3), pages 775-786.
    3. Dries, Liesbeth & Swinnen, Johan F. M., 2002. "Institutional Reform and Labor Reallocation During Transition: Theory Evidence From Polish Agriculture," World Development, Elsevier, vol. 30(3), pages 457-474, March.
    4. Johan Swinnen & Liesbet Vranken, 2010. "Reforms and agricultural productivity in Central and Eastern Europe and the Former Soviet Republics: 1989–2005," Journal of Productivity Analysis, Springer, vol. 33(3), pages 241-258, June.

    More about this item


    CMEA Trade Shock; Eastern Europe; Economic Transition; Monetary Policy;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems


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