Progress and patterns in transition
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Over the past decade, two broad patterns in transition have emerged. In more advanced countries, rapid liberalisation, sustained macroeconomic stabilisation and comprehensive small-scale privatisation have laid the basis for the gradual development of the institutions that are necessary to support markets and private enterprise. This development has been shaped by both the demand from enterprises and voters, on the one hand, and the strong incentives and guidance of European integration, on the other. In the less advanced countries, progress in liberalisation has been slow and uneven. Moreover, macroeconomic stabilisation in these countries has been jeopardised by the persistence of soft budget constraints for "old" enterprises and banks and by their continuing structural weaknesses, while the business environment for new private enterprises remains difficult.
This chapter analyses the factors that lie behind the patterns of reform observed after ten years of transition. This analysis consists of four main parts. The first two parts examine progress in liberalisation and macroeconomic stabilisation. This analysis reveals a striking degree of variation across transition economies, which is linked with the extent to which hard budget constraints have been imposed on enterprises. It also shows that, while the initial conditions in each country have had a significant influence on the extent and effectiveness of these reforms, policy choices have also been important. The third part examines progress in privatisation, emphasising the various objectives and constraints of medium- and large-scale privatisation and how the privatisation of state enterprises has not always led to a reduction in political intervention and an improved performance. In contrast, small-scale privatisation has been much easier to implement and its widespread implementation has helped to create a demand for effective market-oriented institutions. The fourth part examines the process of institutional change, focusing on the demand for market-oriented institutions and on the process through which they are established.
Before analysing the patterns of reform, however, the chapter examines recent reform developments and finds that the pace of overall progress in market reforms in the region over the past year has remained slow. The past two years have seen only gradual reform gains after a period of rapid progress up to 1997. One reason for this slowdown has been the widening disparity among countries, with continued reform progress in some countries offset by reversals in others. For example, the crisis in Russia in 1998 and its regional repercussions have contributed to setbacks in the liberalisation of prices and trade and in banking reform in a number of CIS countries. In contrast, Bosnia and Herzegovina and Romania have achieved significant reform advances over the past year, while Bulgaria has continued to build on its comprehensive reform programme initiated in 1997. A second reason for the slow overall progress in reform is the inherently gradual nature of the developing institutions that support markets and private enterprise, as the tasks of liberalisation and privatisation become complete.
The chapter concludes by assessing the challenges of the second decade of transition and the need to improve the investment climate. This assessment emphasises that sustained liberalisation and stabilisation remains a challenge in a number of countries, particularly in south-eastern Europe and the CIS. The economic and social costs involved in adapting enterprises to market pressures lie at the root of the problem. One way to ease this constraint would be to reduce obstacles to the growth of new private sector companies, particularly by strengthening the economic governance provided by the state. The analysis in this chapter also emphasises that in countries where liberalisation and stabilisation have been sustained, the development of institutions that support markets and private enterprise has advanced steadily. However, it must be recognised that these institutions do not develop simply in response to demands from the private sector. The state must play a strong and leading role in developing wellfunctioning institutions. Given the varying constraints on the power of the state across the region, one way of ensuring institutional reforms is to open the country to the discipline of foreign competition and to increase its international integration.
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