Economic reform in Eastern Europe and the U.S.S.R.

• Author: Fischer, Stanley
• Position: National Bureau of Economic Research's Annual Research Conference - I

Economic Reform in Eastern Europe and the U.S.S.R.

Stanley Fischer

The NBER's research on economic reform in Eastern Europe and the U.S.S.R. is part of its overall project on "The Economics of National Security." Research Associate Olivier J. Blanchard of MIT directs the work on the macroeconomics of stabilization, while Research Associates Kenneth A. Froot of MIT and Jeffrey D. Sachs of Harvard oversee the research on the structural elements of economic reform.

There are no historical examples of economic reform as broad and rapid as what is now envisaged in Eastern Europe. In analyzing the reform processes there and in the Soviet Union, we have had to draw on both theory and the partial reform experiences of other economies. The extent to which simple theory - for example, supply and demand analysis, and intermediate macroeconomics - can illuminate the experiences of the formerly socialist East European economies is impressive. The precedents come from reform attempts in the developing countries, from the reform programs in China, Hungary, and Yugoslavia, and from the industrialized economies, including Britain with its privatization program. However, there is always the question of whether different methods are needed for systemwide reform - such as the privatization of all industry - than for more modest reforms that have been attempted within a market economy.

Now, roughly two years after serious systemwide reforms became a realistic prospect, the early and tentative lessons are beginning to come in.

The Problem

The problem in all the reforming countries is how to transform into a modern western market economy an economy with massive, and sometimes near total, state ownership, which relies to a considerable extent on central planning and pursues international trade on a quasi-barter basis at prices that differ grossly from those in the rest of the world. The social cost must be as low as possible. While there has been much discussion of which is the best western model, the formerly socialist economies have a way to go before having to choose the West German, or the U.S., or some other model.

The reforming economies started from different points. Some, such as Hungary and Yugoslavia, were significantly decentralized; the extent of public ownership differed; and some, such as Poland and the Soviet Union, had developed massive macroeconomic imbalances, visible in large budget deficits and inflation. These differences affect their reform...