Macropolicies in Transition to a Market Economy: A Three-Year Perspective

Countries in transition to market economies have had to implement macroeconomic stabilization programs at the same time that they were engaged in massive changes of their political institutions and the systemic frameworks of their economies. What has been the interaction of stabilization with economic liberalization and deep institutional reform in the countries of Eastern Europe, in particular, the relations among initial conditions, political developments, reform strategies, and outcomes? Experience in Eastern Europe suggests that when there is a political breakthrough (as in the countries under review) a radical stabilization-liberalization strategy is probably the least risky approach to reform and will not constrain output or structural reform over the medium term. Even stabilization that is initially successful in containing inflation will later come under pressure because of social policies and the structural transitions impelled by reform. Several factors are identified that affect the credibility of reforms, and lessons are derived for countries that have stabilized and those that yet face this task.