Privatization, Competition, and Structural Change in Eastern Europe
MARTIN C. SPECHLER
No one who knew Eastern Europe before 1989 doubted how much structural change was necessary before the countries of the area (including the former Soviet Union) could reenter the European market as equals. Five years later, the Czech Republic, Hungary, Poland, Slovakia, and Slovenia bottomed out and began recoveries at encouraging rates during 1994. Although much has been accomplished, particularly in freeing retail markets, reducing subsidies, and redirecting foreign trade to the West, much still remains to be done. In particular, workable competition among producers has yet to be assured in many markets. An unfortunate emphasis placed by visiting experts and international bodies on privatization of ownership has obscured the necessity of restoring competition required to make the newly private entities work for the public interest. In practice, the failure to attend to deconcentration after the initial macroeconomic stabilization has limited growth and increased income inequality in the area. Indeed, premature privatization of state-owned enterprises may have aggravated existing structural inefficiencies without ensuring the development of new private investments. This chapter analyzes the failure of Eastern European countries to establish competitive markets and suggests some remedies.
The East European countries' former hierarchical system of ministerial orders and ad hoc incentives--euphemistically called a "planned" economy--collapsed in 1989-1990, leaving enterprises without information and clear market signals. Since then, enterprises have had to rely much more on horizontal links based on financial advantage. Ministry personnel who used to mandate these links no longer have the authority to do so, but independent industry-level as-