Transition failures: How does Southeast Europe fit in?

Many pundits judged the early 1990s through the fervour and the intellectual lenses of Francis Fukuyama's ‘end of history’ injunction. In a fundamental sense he was right: 1989 marked a watershed in history, signalling the demise of Communism. In another sense, his analysis simplified and obscured resilient forces at work in history, forces that maintain ideological and religious differences and when unleashed by democracy and mutual tolerance, can lead to massive human suffering, such as inter‐ethnic conflicts and wars.1 The Balkans are probably the most salient proof that history is still very much with us. What went wrong with the economies in Southeast Europe? Two layers of perceptions explain the relative neglect of the deeper causes of economic reform failures. One layer focuses on the consequences of the dissolution of former Yugoslavia through wars, which produced distress economies. According to this nexus, the horrible state of the economies is the direct outcome of military conflagration and the immense destruction of material assets. This layer understates that even new sovereign entities must undergo thorough change to overhaul an economic regime that relied on ‘self‐management’. Another layer of perceptions comprises cliches and rhetoric that simplistically pin success to privatization, price liberalization and macro‐economic stabilization, and to the lack of needed institutional change.2 How deceptive, for example, stabilization can be is evident in the case of Albania. A few years ago, the country was labelled a model of democratic and market reforms, with inflation running at an annual rate of below 5 per cent. Soon after, the country plunged into a major crisis following the collapse of the pyramid schemes. Albania again has a low inflation rate, but nobody is naive enough to repeat the statements of the mid‐1990s. This simplistic vision underestimated: the region's relative backwardness, rooted deeply in history;3 institutional weakness in countries that practised late Stalinism until the very end of the Communist system (Romania and Bulgaria)4 or until chaos struck (Albania); initial conditions in terms of the extensive required resource reallocation cumulated with the inability to undertake restructuring;5 proliferation of the unofficial economy and pervasiveness of organized crime;6 social exclusion; the almost congenital fragility of the banking systems; the role of geography; and the low level of foreign direct investment (FDI). 7 This oversimplified view needs to be related to lessons of transition in general, since economic dynamics in most post‐Communist countries have disproved the high hopes of the early 1990s. Post‐Communist transformation8 has proved to be a much more complex process than initially thought. This paper examines the economic situation in Southeast Europe, embedding it in the lessons of transition. The analysis is not meant to be exhaustive but will instead highlight relevant features of transformation. It focuses on the exigencies of accelerating reforms and empowering citizens, together with the need for enacting public policy for the common good.