Ten Years of Transformation : Macroeconomic Lessons
After surveying the facts and distilling the voluminous literature on the transition to market economies, the author arrives at several conclusions: with hindsight, the old debate - Big Bang versus gradualism - was really a problem of feasibility,...
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| Format: | Working Paper |
| Language: | English Spanish / Castilian |
| Published: |
World Bank, Washington, DC
2015
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| Online Access: | http://documents.worldbank.org/curated/en/2000/02/438332/ten-years-transformation-macroeconomic-lessons http://hdl.handle.net/10986/22337 |
| Summary: | After surveying the facts and distilling
the voluminous literature on the transition to market
economies, the author arrives at several conclusions: with
hindsight, the old debate - Big Bang versus gradualism - was
really a problem of feasibility, although many of the
arguments in favor of the Big Bang have now been proven
right. Once more, inflation has been found to be
incompatible with growth and the importance of a good
microeconomic structure - especially an effective banking
system - has been confirmed. The decline of the state in
transition economies is both spectacular and puzzling -
combining features that are both desirable and dangerous.
Among useful lessons learned: 1) It has paid to start early
and move fast. The Big Bang is highly desirable but
impractical, and gradualism is unavoidable but ought to be
compressed as much as possible. The countries that bit the
bullet early and hard have done better over the past decade.
2) Stabilize first; growth next. Macroeconomic stabilization
is a prerequisite for growth. The budget deficit need not be
eliminated, but the link between deficits and money growth
must be severed. 3) Structural reform is important, and
microeconomic policies, often overlooked, should be started
as soon as possible. This means establishing property
rights, hardening budget constraints, building a healthy
banking system, and ensuring true domestic competition. 4)
The choice of an exchange rate regime, another early
controversy, is apparently less important than adherence to
a strict monetary policy. The floaters have tightly managed
their exchange rates, while the fixers have repeatedly
devalued and have often ended up floating. Some form of
monetary targeting is needed, but it matters little which
target is chosen so long as it is adhered to. 5) Creating
irreversibilities early on allows governments to change
without seriously affecting the transition. The less stable
the economy, the more politics matters. A shaky economic
basis is fertile ground for policy reversals that set the
clock back several years (Bulgaria, Romania, Russia). |
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