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Ten years of transformation - macroeconomic lessons

  • Wyplosz, Charles

After surveying the facts and distilling the voluminous literature on the transition to market economies, the author arrives at several conclusions: with hindsight, the old debate - Big Bang versus gradualism - was really a problem of feasibility, although many of the arguments in favor of the Big Bang have now been proven right. Once more, inflation has been found to be incompatible with growth and the importance of a good microeconomic structure - especially an effective banking system - has been confirmed. The decline of the state in transition economies is both spectacular and puzzling - combining features that are both desirable and dangerous. Among useful lessons learned: 1) It has paid to start early and move fast. The Big Bang is highly desirable but impractical, and gradualism is unavoidable but ought to be compressed as much as possible. The countries that bit the bullet early and hard have done better over the past decade. 2) Stabilize first; growth next. Macroeconomic stabilization is a prerequisite for growth. The budget deficit need not be eliminated, but the link between deficits and money growth must be severed. 3) Structural reform is important, and microeconomic policies, often overlooked, should be started as soon as possible. This means establishing property rights, hardening budget constraints, building a healthy banking system, and ensuring true domestic competition. 4) The choice of an exchange rate regime, another early controversy, is apparently less important than adherence to a strictmonetary policy. The floaters have tightly managed their exchange rates, while the fixers have repeatedly devalued and have often ended up floating. Some form of monetary targeting is needed, but it matters little which target is chosen so long as it is adhered to. 5) Creating irreversibilities early on allows governments to change without seriously affecting the transition. The less stable the economy, the more politics matters. A shaky economic basis is fertile ground for policy reversals that set the clock back several years (Bulgaria, Romania, Russia).

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2288.

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Date of creation: 29 Feb 2000
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Handle: RePEc:wbk:wbrwps:2288
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  1. Aghion, P. & Blanchard, O.J., 1993. "On the Speed of Transition in Central Europe," Working papers 93-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Giavazzi, Francesco & Pagano, Marco, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," CEPR Discussion Papers 1284, C.E.P.R. Discussion Papers.
  3. Portes, Richard, 1994. "Transformation Traps," Economic Journal, Royal Economic Society, vol. 104(426), pages 1178-89, September.
  4. Kornélia Krajnyák & Jeromin Zettelmeyer, 1997. "Competitiveness in Transition Economies; What Scope for Real Appreciation?," IMF Working Papers 97/149, International Monetary Fund.
  5. C Grafe & C Wyplosz, 1998. "The Real Exchange Rate in Transition Economies," CEP Discussion Papers dp0395, Centre for Economic Performance, LSE.
  6. Gérard Bélanger, 1994. "Eastern Europe; Factors Underlying the Weakening Performance of Tax Revenues," IMF Working Papers 94/104, International Monetary Fund.
  7. Anders Åslund & Peter Boone & Simon Johnson, 1996. "How to Stabilize: Lessons from Post -communist Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 217-314.
  8. Philippe Aghion & Olivier Jean Blanchard, 1994. "On the Speed of Transition Central Europe," NBER Working Papers 4736, National Bureau of Economic Research, Inc.
  9. Mathias Dewatripont & Gérard Roland, 1992. "The virtues of gradualism and legitimacy in the transition to a market economy," ULB Institutional Repository 2013/9587, ULB -- Universite Libre de Bruxelles.
  10. Saunders, Anthony & Sommariva, Andrea, 1993. "Banking sector and restructuring in Eastern Europe," Journal of Banking & Finance, Elsevier, vol. 17(5), pages 931-957, September.
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  13. Fischer, Stanley & Sahay, Ratna & Vegh, Carlos A, 1996. "Economies in Transition: The Beginnings of Growth," American Economic Review, American Economic Association, vol. 86(2), pages 229-33, May.
  14. Pleskovic, Boris, 1994. "Financial policies in socialist countries in transition," Policy Research Working Paper Series 1242, The World Bank.
  15. Ardagna, Silvia & Alesina, Alberto, 1998. "Tales of Fiscal Adjustment," Scholarly Articles 2579822, Harvard University Department of Economics.
  16. S. Fisher & R. Sahay & C. A. Vegh, 1997. "Stabilization and Growth in Transition Economies: The Early Experience," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.
  17. Abel, István & Bonin, John, 1992. "The `Big Bang' Versus `Slow but Steady': A Comparison of the Hungarian and the Polish Transformations," CEPR Discussion Papers 626, C.E.P.R. Discussion Papers.
  18. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
  19. Gerard Caprio, Jr., 1995. "The role of financial intermediaries in transitional economies," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 257-302, June.
  20. Corbett, Jennifer & Mayer, Colin, 1991. "Financial Reform in Eastern Europe: Progress With the Wrong Model," CEPR Discussion Papers 603, C.E.P.R. Discussion Papers.
  21. Selowsky, Marcelo & Martin, Ricardo, 1997. "Policy Performance and Output Growth in the Transition Economies," American Economic Review, American Economic Association, vol. 87(2), pages 349-53, May.
  22. Alberto Alesina & Silvia Ardagna, 1998. "Tales of fiscal adjustment," Economic Policy, CEPR;CES;MSH, vol. 13(27), pages 487-545, October.
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