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Socialist economies in Eastern Europe have collapsed and em- barked upon market-oriented reforms. The causes of the demise of centrally planned economies are analyzed and the basic challenges of systemic tranformation discussed. Negative income and wealth effects as well as distribution issues make adjustment extremely difficult. The fundamental roles of privatization and foreign investment are adressed. Foreign economic liberalization is considered to be of centralimportance for a growth-oriented adjustment path in a stage of conflict-prone policy and options. Politico-economic aspects of the new European developments in addition to North-South issues are analyzed. Difficult choices await decison-makers in economic policy and the business community in Eastern Europe and in leading market economies.

Inhaltsverzeichnis

Frontmatter

A. Characteristics of the Centrally Planned Economy and Systemic Collapse

Abstract
Eastern Europe is facing a complex transformation process after the collapse of socialism in the last quarter of this century. This collapse is the result of an intellectual legacy and ideology which initially came from the West. The West, however, was prudent enough not to follow the ideas of MARX and ENGELS, but developed different answers to the obvious misery of the Industrial Revolution and the dynamics of market economies with their contradictions of fast, volatile and sometimes unstable financial markets on the one hand, and, slow factor markets and goods markets on the other hand. After a brief analysis of the crisis of socialism, we will turn in chapters B-E to theoretical and practical questions of systemic transformation.
Paul J. J. Welfens

B. Inefficiency, Instability, and Restricted Options

Abstract
The former socialist economies of Eastern Europe have decided to switch to a market-based economy and to thereby radically change the set of economic institutions and preferred attitudes in society. The virtues of market-based factor allocation and competition are not easy to recognize for people who lack experience with a decentralized economic system in which allocation is guided by prices and price expectations and in which individual efforts are rewarded. A market-based system means facing uncertainty and risk for the individual, and only part of it can be reduced by insurance markets.
Paul J. J. Welfens

C. Privatization and Foreign Investment in Eastern Europe

Abstract
Having experienced a decade of economic stagnation and increasing political and economic disruptions the East European economies — including the republics of the former USSR — have finally decided to radically change their socialist economic system and move towards a market economy. In order to achieve a market-based system a lengthy transition process must be endured in which new institutions are created, the distortions of the command economy removed and the supply-side is reorganized in a way that economic resources are efficiently produced and distributed. This transition period to a market-based system necessarily cannot be characterized by the same economic and political principles as those shaping the desired new market economy. Even the case of the former GDR is not a pure big leap strategy, although the introduction of West Germany’s institutions and laws in the context of economic union on June 1, 1990 and political union on October 3, 1990 brought a radical regime switch for Eastern Germany; this switch, however, was mitigated by transitory regulations in many fields (e.g. environmental protection and labor market regulations) and a massive West-East transfer of resources in the united Germany. The privatization process as a centerpiece of systemic change was organized by the Treuhandanstalt (“THA”, a public entity under the supervision of the Bundesministerium der Finanzen) and has made considerable progress within two years: the so-called small privatization in the retail and small service industry has been fully completed, while the “big” privatization of industry has made progress to the extent that 1/2 of the some 11,000 firms had been privatized by the May 1992 (accounting for roughly 40 % of all jobs in THA enterprises). West German firms clearly dominated as buyers of privatized firms, i.e. they accounted for 90 % of the assets that were privatized. Foreign investment has so far played a minor role even in the manufacturing industry and in the services industry where West Germany traditionally has recorded a high stock of inward foreign investment.
Paul J. J. Welfens

D. Foreign Economic Liberalization in Eastern Europe

Abstract
Traditionally, socialist economies in the CMEA were isolated from Western world markets. State foreign trade organizations handled the bilaterally fixed intra-CMEA trade and were responsible for trade with capitalist countries which was frequently conducted via barter trade agreements. Production was based on monopolistic intra-CMEA specialization which was further distorted by political considerations dominated by Soviet interests. This did not rule out that the USSR implicitly subsidized the smaller CMEA countries via natural resource exports that were underpriced relative to the world market. Divergences between export prices within the CMEA and domestic prices were characteristic for all CMEA countries. With inconvertible currencies, sustaining shortages in the official economy and a thriving shadow economy, black market exchange rates were well above official exchange rates, and currency substitution plagued most CMEA countries.
Paul J. J. Welfens

E. East-West Problems in Europe and North-South Conflicts

Abstract
A new Europe is emerging after the politico-economic collapse of socialism in Eastern Europe. The smaller countries of the former Council of Mutual Economic Assistance (CMEA) have split into two groups: on the one hand, the group of fast reforming economies Poland, Hungary and the CSFR – possibly enlarged by Croatia and Slovenia -, and the slowly changing countries Romania and Bulgaria in which former communists exert no less influence than in Yugoslavia’s core Serbia. The former USSR has disintegrated into several countries, most of which are forming the Commonwealth of Independent States. The CIS and the future countries that might finally emerge from it – with separate currencies and new customs duties that impair trade – face much more difficult problems in systemic transformation than the smaller ex-CMEA countries. Without a functional memory of the market economy and a stabilizing middle class and saddled with ethnic minority problems in a period of new nationalism as well as so many new economic problems, the former USSR will face a difficult adjustment path.
Paul J. J. Welfens

Backmatter

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