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East: Road To Capitalism Seen Bumpy But Rewarding

Twenty-six countries -- including those of the former Soviet republics and Eastern Europe -- embarked on the road of economic transformation 10 years ago. Experts say that although most used similar economic strategies, not all succeeded. The lessons of transition were discussed last week at a conference at Columbia University in New York.

New York, 23 November 1999 (RFE/RL) -- Experts say transforming a planned economy to a market-based system requires not only unwavering political will, but also sound economic strategies.

Last week, a group of influential economists gathered at Columbia University in New York to compare notes from the transition period and to debate the merits of various strategies, including exchange rate regimes, trade liberalization, and monetary and fiscal policies.

Stanley Fischer, first deputy managing director of the International Monetary Fund (IMF), crystallized the conference's main themes in his keynote address:

"The question that this 10 years throws up more than any other is: What is it that made it possible for some countries to go down a route that had been recommended and thought through? Not perfectly by any means -- there were lots of questions -- but the broad direction in which to go ahead. What made it possible for some countries to do that well? And what is it that made other countries quite unwelcoming to those approaches and made it very difficult to get them instituted?

Fischer says Poland and the Baltic states -- Latvia, Lithuania and Estonia -- stand out as successes. Yet Russia -- which followed similar economic strategies -- faces many serious problems.

Fischer suggested several factors that help explain these differences: the length of time the country was under communism, the distance of the transitioning country from Western Europe, and whether or not the country got into war during the transition period.

The desire to be full-fledged members of the European community propelled reformers in the Baltic and Eastern European countries and made them more willing to swallow the economic medicine prescribed by Western advisors.

Shock therapy -- a series of rapid, radical changes -- aimed to jumpstart the economies so they could enter the world market. Certain reforms, like lifting price controls and liberalizing trade markets, could be changed rather quickly. Yet others, such as legal and institutional overhauls, could take up to a decade.

Policymakers envisaged a pattern of initial decline of two or three years followed by recovery. In Central and Eastern Europe, Fischer says output fell on average by 28 percent; in the Baltics, by 43 percent; and in the rest of the former Soviet Union, by 54 percent. He says recovery began in Central and East European countries in 1992; in the Baltics, by 1994, and in the rest of the former Soviet states, by 1995.

Fischer said hindsight proved the policymakers correct.

"At least insofar as the economics goes, the prescriptions that were put 10 years ago seemed to be right. We couldn't find through various tests -- we don't have a lot of degrees of freedom, but it's a panel of 26 countries with, using growth rates 8, 9, 10 -- you don't find that more rapid stabilization had adverse effects. In fact, quite the contrary."

Yet experts say troubling facts remain. Only in Poland, Slovakia, and Slovenia has the 1999 level of unmeasured output surpassed that of 1989. Other countries, such as Russia, are still struggling.

One reason, Fischer suggests, is that Western assistance to transitioning countries has not been overly generous.

"There was no Marshall Plan of any sort. Western assistance to these countries had been very small. I read frequently about the IMF dispersing infinite amounts to Russia. The IMF has lent Russia $21 billion in six years. We lent (South) Korea $18 billion in 6 months of which $15 billion went in three months. The Russia program was small relative to the scale of the economy, not large. The only country that provided significant amounts of assistance was Germany in the form of trade credits. But there was not at any time for the former Soviet Union massive assistance."

Fischer also said he supported continued lending to Russia, despite allegations of widespread corruption. IMF loans, he explained, aim to strengthen forces for reform inside a country and to create incentives for anti-corruption parties to rise.

Western policymakers, says Fischer, have not yet found the right mix of incentives to shift the balance of power in Russia.

"We should not delude ourselves. We don't have [much influence over what happens in Russia]. Russia is too big. The interests are too powerful. The concerns are too important for us to be able to lever [influence] very much with what we have to offer. But we can make a difference. And it's not true that we can do nothing. We can help. We will not be decisive. But we haven't found the right levers so far."

Fischer said the international community can encourage reform through economic incentives. But he said lasting change must come from within a society.