Ten years of transition
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The fall of the Berlin Wall in November 1989 was a time of hope. It was also a time of euphoria and triumphalism, leading some to believe that the process of building market-oriented economies, democratic societies and good governance could be simple and short. Some thought that the dynamism and efficiency of the market system would lead inexorably to rapidly rising living standards and strong economic growth. But the experience has demonstrated that the process of transition from the command to the market economy is complex, difficult and lengthy. The dislocations and stresses can be profound and severe. The transition is not a steady forward march, or a linear process; there have been and will be setbacks and crises along the way. It has a long way to go.
The naivety of some of the early hopes and expectations must not, however, be allowed to obstruct recognition of the remarkable changes over the past ten years. Most goods and services are produced by the private sector and are exchanged in markets. Democratic systems have been established rapidly; fair and free elections in most countries have led to the democratic change of governments. The political process has shown real robustness in the face of crises and hardship. Strong and continuing commitment to market reform and democratic processes has been shown across the political spectrum and has been maintained across changes of government. There is little likelihood of a return to the old political structures. These achievements are fundamental landmarks of the twentieth century.
The common challenge of establishing a market system from a command economy, however, diverted attention from the many and basic differences between the countries of the region at the outset of transition. This may in turn have led to an assessment of prospects which was overly uniform. Economic structures, history (including the history of reforms), geography, resource endowments, culture and indebtedness all varied sharply across the countries of the region at the outset of transition. The countries of the Commonwealth of Independent States (CIS) had lived under central planning for 70 years, while for others it was imposed after the Second World War. Some, such as Hungary and Poland, had experimented with reforms prior to the 1990s. Countries have also differed greatly in the policies pursued. As a result of these fundamental differences in both initial conditions and policies, the experience across countries over the past decade has varied enormously. Indeed, it is this variation that, in large part, provides the foundation of the lessons drawn from the first decade of experience.
The contrasts between the largest country of central and eastern Europe and the Baltic region (CEE), Poland, and the largest country of the CIS, Russia, are striking and instructive. Poland has shown a strong and steady emphasis on liberalisation and macroeconomic stability, together with a measured and controlled approach to privatisation and to building the financial sector. Russia, in contrast, has also liberalised and privatised but its macroeconomic policy has been haphazard, its privatisation deeply flawed and its financial sector poorly regulated, fragile and corrupt. Poland’s economy has grown strongly since 1992. Russia’s economy has declined in every year except 1997, with the nascent economic growth in that year smothered by the traumatic events of 1998.
Lessons from such contrasts have to be treated carefully, particularly in relation to the starting points, but the differences tell us a great deal about the process of transition. This Transition Report , like its predecessors starting from 1994, provides an analysis of, and draws lessons from, the comparative experience of the 26 countries of the region that are members of the EBRD. The assessment in this Report looks back on a full decade of transition and forward to the challenges ahead. One clear and basic lesson stands out: a strong, effective and committed transition is both feasible and yields substantial and sustainable rewards.
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