Report on adjustment lending II : lessons forEastern Europe

The Bank introduced adjustment lending in 1979 to help member countries restructure their economies to create conditions conducive to equitable growth while maintaining a sustainable balance of payments. A review of the experience of other nations with adjustment problems may provide useful knowledge for Eastern Europe as the region attempts to make the transition to market economies and to integrate with the world economy. Reforms such as those that Eastern Europe is initiating now have little precedent in recent economic history. Evidence from other countries indicates that output levels are likely to suffer in the early years of massive economic restructuring. Governments must be aware of these adjustment costs, which represent an investment in a better economic system. Recent experience in other countries suggests several constructive steps that Eastern European countries can take to ease their transition to market economies. These include : 1) placing a high priority on dealing with high open or repressed inflation and other manifestations of severe macroeconomic imbalances; 2) removing restrictions on labor mobility and on the exit and entry of firms at the same pace as they liberalize trade; and 3) moving early to create markets for working capital financing - with appropriate mechanisms to assess credit risks - in order to encourage economic restructuring.