Two Decades of Eastern Europe's Economic Transformation: Lessons for Greece?
Giannaros, Demetrios, International Advances in Economic Research
In 1990, Vice-Premier and Finance Minister of Poland, Leszek Balcerowicz [Balcerowicz, Economic Policy: A European Forum, 1994] introduced one of the most dramatic economic system transformations. His economic policy actions, which implemented the restructuring of the Polish economy from a planned type to a market-based economy, were dramatic. Many other Eastern Bloc countries initiated economic transformation plans of their own. In 2009, Greece faced massive budget deficits and outstanding government debt that were not sustainable. This required major structural changes in the economy and government. The Greek government responded through tough budget and economic restructuring policies. Our study reviews and analyzes the macroeconomic impact of the unprecedented historic economic transformation of Eastern Europe and discusses what conclusions can be drawn that may be applicable to the current Greek economic and public sector restructuring. Similarly to the outcomes of Eastern Europe, we expect a structural break with a negative impact in the short-run but positive over the long-run.
Since World War II, Greece has been a heavily regulated market economy with significant public sector employment and production. Thus, the parallel between Greece and that of Eastern Europe is very limited in the spectrum of market versus planned economies. However, the actions taken in Eastern Europe and some actions taken in Greece since 2009 to restructure the Greek economy and government apparatus--as demanded by the IMF and the European Union for providing debt repayment loans--have similarities. The Greek government's political reforms (dramatic reduction of regional and city governments) and economic reforms (e.g., reduction of public sector incomes and benefits, regulation of labor, and regulation of markets and monopoly power) are significant.
We evaluate the economic performance of some of the Eastern European countries in transition using real economic growth rates for the pre-1989 period (1980-1989) and the post-1989 period (1990-2010) and break it down to relevant sub-periods. Based on the data, the 1990s was a very difficult period for the six Eastern European countries in our study. In the 1990s, the period of economic system transition, the average growth rate for all countries studied was negative (-0.72%) versus a positive growth rate of 1.96% in 1980-1989 and 3.85% in 2000-2010. Thus, the 1990s political and economic system restructuring caused short-term to medium-term dislocations, inefficiencies, and losses of production, income, and consumption. However, during 2000-2010, we observe robust average economic growth of 3.85% versus 1.96% during 1980-1989.
To evaluate the transition period using structural break analysis, we break down the 1990s into two distinct periods--the period of intensive system changes (1990-1994) and the less intensive adjustment period (1995-1999). …