The Political Economy of Transition: Coming to Grips with History and Methodology

By Jozef M.Van Brabant | Go to book overview
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The first group of major policy topics to be addressed in any transformation agenda comprises stabilization (see Chapter 3). As summarized in Table 3.1 (p. 112), this can logically be separated into stock and flow stabilization. Determined policies aimed at regaining macroeconomic stability should logically be considered separately from pursuing prudent macroeconomic policies to ensure that basic aggregate balances are not perturbed, thus possibly generating situations that are unsustainable or that exert deleterious effects on economic activity.

I first explain why brisk stabilization may be required and why the pursuit of prudent macroeconomic policies must be a priority for policy makers in general and for those managing the transformation in particular, once basic stabilization is achieved. Next I examine the initial approaches chosen by most transition economies. I take stabilization to mean here essentially ensuring that the foundations for a stable currency are in place, although this was by no means self-evident for many of the successor States, as I discuss next. Some have opted eventually for a currency board, which I briefly clarify thereafter. Then I look at the broad meaning and purposes of stabilization programs, with particular reference to the challenges of transformation. In the following two sections, I detail monetary and fiscal policies, and their institutions and instruments, during the transition. I conclude with a few notes on desirable tightness in macroeconomic stances.

Section 1:

The need for stabilization and macroeconomic prudence

Macroeconomics in any functioning market economy is all about policies that through appropriate institutions and instruments aim at coordinating the interests of economic agents with a view to maximizing society’s welfare. The means utilized to proceed in a transition economy and the objectives to be served under a more democratic environment differ in principle from those targeted under state socialism or a mature market economy. As assessed through pluralistic means, society’s preferences may be very complex, not necessarily a monotonic function of the availability of goods and services. There are furthermore competing claims


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