In Search of Markets: Transition Economies in Eastern Europe

Article excerpt

THE countries of Eastern Europe after World War II, following the earlier Russian example, seceded from the market economy and installed command systems governed by central planning. But after 1990 all these countries underwent a political and economic transformation and shifted to market-based economies. This process is labelled as the transition. It differs from reform because it involves systemic change and regime transformation.

In a recent trip through Russia, Bulgaria, and the Czech Republic, I travelled with a group of ten academics from different American universities under a Faculty Development for International Business sponsored grant. For me the trip was an eye opener since I had not been in Russia for many years and I was last in Eastern Europe five years ago. The trip revealed that the transition process has been uneven in intensity. We found that these countries are experiencing inefficiencies in resource allocation, emerging businesses still face uncertainties, and there are still intrusive sets of controls. The path of reform has been more difficult in some countries than in others. For instance, the Czech Republic has had a successful outcome installing a parliamentary system and has an expanding economy. Russia and Bulgaria, on the other hand, have achieved political democracy, but their economies have lurched along.

All three countries have embarked on a transition to a decentralized market economy and have followed relatively similar paths. For the most part, they have dismantled planning, lifted price controls, privatized state-owned enterprises, and opened their economies to trade and investment. The wide range of changes in each country has yielded benefits and costs. The winners seem to be the young, the best educated, and those who are well connected. The losers tend to be the elderly, the less educated, and the less mobile.

The opening of markets to entry by new businesses has not altogether been smooth. Reforms of accounting standards, the tax system, the financial sector, and services have been attempted, but with different degrees of success. The process has been faster in the Czech Republic and slower in Bulgaria and Russia. Other reforms have been inherently slow.

Along with the lectures from academics, presentations by government officials and private businesses, many questions were raised on various topics, from the complexities of institutions in a new environment to taxation and entrepreneurship. The same was true after various plant visits in all three countries. For the most part, the discussions were frank and open.

In the ongoing transition process, there are a number of issues that still need to be resolved. For instance, while the shift to the market has altered the behaviour of many enterprises and the labour force, there is still a bureaucratic culture that lingers from the old command system, causing delays and inefficiencies. The privatization process was supposed to bring about greater efficiency and competitiveness, although not necessarily lower prices. However, the process itself was marred by a lack of transparency. Valuable assets were given away in cozy deals. The property grab led to the formation of a new political class or oligarchy. The new businesspeople who amassed their instant fortunes have risen to power and/or, in some sense, bought their way to power.

Foreign direct private investment has been a much-needed injection of capital in all three countries. The Czech Republic has benefited the most from foreign investment, in part due to its high level of industralization, a well-educated labour force, and political stability. Russia and Bulgaria, on the other hand, are actively seeking higher levels of foreign investment but the inflow has not been as expected because the rules of the game are not always clearly established, and because foreign firms encounter higher levels of corruption as they try to get a foothold of that market. …