The choice of the transition strategy was influenced by the critical state of most post-socialist countries. Policy-makers were persuaded that political credibility took precedence over a sequenced reform plan and to introduce macro-economic stabilization measures ahead of structural measures that would by their nature take longer to implement. The "credibility" of the transition process was enhanced by the adoption of the Washington Consensus favoured by the IMF and the World Bank. Stabilization was deemed a necessity in Hungary and Poland where state budget deficits had grown and foreign debts had become larger than the country's capacity to service.
Western advisers and domestic experts working with the national governments and the IMF introduced stabilization programmes aiming to achieve external and internal balance, which became known as shock therapy. It was argued that "one cannot jump over a chasm in two leaps". The many foreign advisers from, principally, the United States, the United Kingdom and Sweden were often under contract to the international financial institutions and bilateral or multilateral technical assistance programmes. They favoured free trade and exchange rate convertibility rather than trade protection and capital controls, which might have checked capital flight.
They tended to support privatization without prior industrial restructuring; an exception was to be found in Eastern Germany where the Treuhand Trust Agency prepared state-owned enterprises for the market at considerable cost to the government.
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It had been expected that the introduction of current account convertibility and foreign trade liberalization would force a currency devaluation that would support export-led growth. Consumers reacted by reducing their purchases and by substituting better quality imported goods in place of domestically produced goods. Falling sales led to the collapse of many domestic enterprises, with personnel lay-offs or reduced hours of work and pay.
This further reduced effective demand. As imports grew and exporters failed to respond to opportunities in world markets due to the poor quality of their products and lack of resources for investment, the trade deficit expanded, putting downward pressure on the exchange rate. Many wholesalers and retailers marked prices according to their dollar values and the falling exchange rate fed inflation. The central banks in several countries raised interest rates and tightened credit conditions, depriving state agencies and enterprises of working capital.
These in turn found it impossible to pay wages on time, dampening effective demand further. The impacts of the conventional transition strategies proved to be de-stabilizing in the short-term and left the population impoverished in the long-term. Economic output declined much more than expected. The decline in output lasted until for all transition economies. By , economic output had declined across all transition economies by 41 percent compared to its level.
The Central and Eastern European economies began growing again around , with Poland, which had begun its transition programme earliest emerging from recession in The Baltic States came out of recession in and the rest of the former Soviet Union around Inflation remained above 20 percent a year except in the Czech Republic and Hungary until the mids. Across all transition economies the peak annual inflation rate was percent percent in the CIS. Labour force surveys undertaken by the International Labour Organization showed significantly higher rates of joblessness and there was considerable internal migration.
In time domestic producers were able to upgrade their production capacity and foreign direct investment was attracted to the transition economies. Local-manufactured higher quality consumer goods became available and won market share back from imports.
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Stabilization of the exchange rate was made more difficult by large-scale capital flight, with domestic agents sending part of their earning abroad to destinations where they believed their capital was more secure. The promise of European Union membership and the adoption of the EU's legislation and regulations the Community acquis or acquis communautaire helped secure trust in property rights and economic and governmental institutions in much of Central and Eastern Europe. Some economists have argued that the growth performance of the transition economies stemmed from the low level of development, decades of trade isolation and distortions in the socialist planned economies.
They have emphasized that the transition strategies adopted reflected the need to resolve the economic crisis besetting the socialist planned economies and the overriding objective was the transformation to capitalist market economies rather than the fostering of economic growth and welfare. But by , the EBRD was reporting that the effects of the initial starting point in each transition economy on the reform process had faded. Although the foundations had been laid for a functioning market economy through sustained liberalization, comprehensive privatization, openness to international trade and investment, and the establishment of democratic political systems there remained institutional challenges.
Liberalized markets were not necessarily competitive and political freedom had not prevented powerful private interests from exercising undue influence. Ten years on, in the Transition Report for , the EBRD was still finding that the quality of market-enabling institutions continued to fall short of what was necessary for well-functioning market economies. Growth in the transition economies had been driven by trade integration into the world economy with "impressive" export performance, and by "rapid capital inflows and a credit boom".
But such growth had proved volatile and the EBRD considered that governments in the transition economies should foster the development of domestic capital markets and improve the business environment, including financial institutions, real estate markets and the energy, transport and communications infrastructure. The EBRD expressed concerns about regulatory independence and enforcement, price setting, and the market power of incumbent infrastructure operators.
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Income inequality as measured by the Gini coefficient rose significantly in the transition economies between and and the mids. Poverty re-emerged with between 20 and 50 percent of people living below the national poverty line in the transition economies. The UN Development Programme calculated that overall poverty in Eastern Europe and the CIS increased from 4 percent of the population in to 32 percent by , or from 14 million people to million.
By , the year before the global financial crisis hit, the index for GDP had reached compared to in for the transition economies. In other words, it took nearly 20 years to restore the level of output that had existed prior to the transition. The global recession of and the Eurozone crisis of destabilized the transition economies, reduced growth rates and increased unemployment. The slowdown hit government revenues and widened fiscal deficits but almost all transition economies had experienced a partial recovery and had maintained low and stable inflation since Transition trajectories have varied considerably in practice.
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Some nations have been experimenting with market reform for several decades, while others are relatively recent adopters e. Not only was the initial level of poverty much higher and food security much lower, but also the agricultural system was quite different. The importance of agriculture in employment was much higher in China around 70 percent than in the Russian Federation less than 20 percent , or in Central Europe 13 percent.
This had an important impact on the reforms. Reforms in China started with re-allocating land rights from the communes, brigades and teams to rural households. With very labour-intensive production, this caused a break-up of collective farms into small-scale household farms. The resulting changes in incentives caused a dramatic increase in productivity and contributed to a strong growth of output.
In contrast, large-scale capital-intensive farming dominated in the Russian Federation and CEECs, where large-scale farms still cultivate much land. The difference between the Russian Federation and CEECs is not so much in the scale of the farm operations, but rather in their management.
In CEECs, effective restructuring and hard budget constraints induced sharp shifts in input use and effective management reforms, causing gains in productivity levels. In contrast, farm restructuring in the Russian Federation was more superficial, and local authorities continue to influence farm management through informal relationships. Differences in restructuring are linked to land reform. In CEECs land was restituted to former owners or distributed to farm workers.
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Although these land reforms were complex, they ended up with relatively strong and well-defined property rights. The Russian and Central Asian land reforms distributed land as paper shares, leading to weak land rights. As a result, family farming is emerging only slowly: large farms have less incentive to restructure and productivity is lagging. Third, in Central Europe and the Russian Federation, the reform strategy included rapid privatization and restructuring of up- and down-stream enterprises.
However, the removal of the central planning and control system, in the absence of new institutions to enforce contracts, to distribute information, and to finance intermediation, caused serious disruptions throughout the agro-food chain. In the initial phase, she chose not to disrupt agriculture by reforming the up-and down-stream sectors. In essence, the procurement and input supply systems remained fully under the control of the state during the early reforms.
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Deregulation of the input and output marketing was only allowed to take place several years after the initial reforms. This gradual liberalization strategy allowed enterprises to reap the informational benefits from price liberalization while avoiding the disruption associated with the breakdown of the planning system.
The importance of creating new institutions to facilitate the exchange of inputs for outputs and the trade of commodities can also be seen from the recent performance of CEECs and the Russian Federation. While output in the latter continued to decline, growth in CEECs resumed and increased with the emergence of new institutions for information, product exchange and contract enforcement. Foreign direct investment FDI has also played an important role in the emergence of new institutions of exchange. Beyond supply of capital, foreign firms have introduced a number of arrangements to encourage greater production and to overcome transition constraints.
For example, food processors have negotiated contracts with banks and input suppliers to provide farms with inputs that enable them to deliver high quality products to their company. The changes that were induced by the first reforms undoubtedly had consequences on food security.
The level of food security and changes during transition have differed importantly between countries. In comparison with countries of similar income levels, CEEC and former USSR countries had high levels of food consumption, sustained by food subsidies which kept food prices low. Consequently, initial drops in food intake after transition were not solely a consequence of lack of food availability but rather caused by a sudden lack of access to food by the collapse of these subsidies.
Income declines and disruptions of social support systems also contributed to the initial drop in food entitlement. In Central European countries - characterized by higher income levels, better developed social welfare systems, smaller output falls, and quicker turnaround with more successful reform effects - declines in income had limited effects on food intake, at least in terms of energy adequacy for most of the population.
Hungary and Slovakia, for example, experienced average drops in energy intake of less than 5 percent during the first years of transition. In Southern European transition countries, such as Romania and Bulgaria - with lower income, less developed social welfare systems and more pronounced output falls- poverty increased more strongly, and food consumption declined on average with 15 percent and more severely for the lowest income groups in the first stages of transition.
These developments and the factors behind them were more marked in the Russian Federation, Ukraine, and Central Asia with some of them showing energy intake drops of more than 20 percent.
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In the poorer countries, households turned quite drastically to household food production. In some countries the share of household production in total consumption doubled. Popular Features. New Releases.
go to link Joseph L. Description Among the states that have moved from authoritarianism in the past 15 years, most have not moved beyond the mere procedures of democracy. They remain entrenched in a 'grey area' in which neither authoritarian nor democratic governance has been established, where incomplete transitions to democracy remain the procedural norm.