Economic inertia in the transitional economies of Central Eastern Europe

Abstract

The restoration of capitalism, opened by the 1989 revolutions in Central and Eastern Europe and by the August 1991 coup/countercoup/revolution in the former Soviet Union, was expected to put those countries back onto the road to greater efficiency, technical progress, and prosperity. A "shock therapy" of price liberalisation, monetary and fiscal austerity, the opening of the economy to unrestricted free trade, and internal convertibility for residents, was understood to require initial sacrifices; however, thanks to stabilisation, privatisation and other economic and political reforms, these side effects would be short lived. In Poland, for instance, the government expected the Balcerowicz Programme to bring about a decline national income of 5% in 1990, with a positive supply response already six months after the beginning of the Programme (Lipton and Sachs, 1990). Western advisors and international organisations encouraged this expectation, in Poland and elsewhere (see Kolodko, 1992a, section 2, who reports their optimistic projections).