On the Speed of Transition in Central Europe

Transition in Central Europe is four years old. State firms that dominated the economy are struggling with market forces. A new private sector quickly emerged and has taken hold. Unemployment, which did not exist, is high and still increasing. Will this process of transition accelerate or slow down? Will unemployment keep increasing? Can things go wrong and how? We make a first pass at answering those questions. The basic structure of the model we develop is standard, that of the transition from a low to a high productivity sector. But we pay attention to two aspects that strike us as important. The first are the interactions between unemployment and the decisions of both state and private firms. The second are the idiosyncracies that come from the central planning legacy, from the structure of control within state firms to the lack of many market institutions, which limits private sector growth. We start with a description of transition in Poland so far. We then develop a model and use it to think about the determinants of the speed of transition and the level of unemployment. Finally, we return to the role of policy and the future in Poland, as well as the causes of cross-Central European country variations.