## public enterprises

(iii) measures that strengthen the economic institutions considered to be crucial for the success of the adjustment program, such as the legal system, tax administration, and customs services.

These microeconomic measures designed to enhance the flow of resources are supplemented by macroeconomic measures that include fiscal austerity, a tight monetary policy, and often a currency devaluation.

## 3 -3-3 The Speed of Reform

The World Bank Development Report of 1991 classifies and compares two different approaches to the speed of reform; 'shock treatment' and 'gradualism'. The report on the one hand points to the merits of shock treatment, noting, "shock treatment implies that efforts are implemented quickly in a concentrated period lasting less than two years... the optimal policy is to implement the program rapidly so that the welfare gain is achieved as quickly as possible. It may be that adjustment costs increase more than proportionately with the length of time taken to implement a reform." On the other hand, the report describes the following advantages of gradualism: "Gradualism in implementing reforms is defined to mean that reform is spread out over more than two years... In an economy with rigid prices and wages or other structural distortions, shock therapy may have perverse effects. If the policy shift is sudden, potentially viable factories may collapse... In such a distorted climate, a gradual policy change may reduce the overall costs of adjustment by spreading out the adjustment over time."

But this kind of dichotomy is not appropriate in considering strategies for the market transitions now underway. The World Bank’s arguments are based upon the experience of those economies, especially in Latin America, where a market economy had already been established at least partially. But acceptance of the shock therapy vs. gradualism dichotomy has led to the widespread conclusion that economic stabilization, as a fundamental condition for economic reform, is best achieved only through the shock approach.

## 3 -4 Strategies of Transition: beyond the Traditional Arguments

## 3 -4-1 The Price Liberalization Process Itself Determines the Stabilization Process

In the present discussion of transition, the main departure from traditional ideas concerning structural reform is the argument that ongoing price liberalization must be seen as an integral part of the whole stabilization process. To clarify this argument, let us consider two alternative scenarios for price liberalization: once-and-for-all price liberalization and phased price liberalization. The analytical framework here is aggregate demand and aggregate supply model which might not be suitable to apply to transitional economies. However, this is still useful to understand price-and-output determination through both demand and supply shiftings, which are brought about by changes in economic variables.

## (1) Scenario One: Once-and-For-All Price liberalization

This brings about hyper-inflation in a short time. To control this inflation, restrictive monetary and fiscal policy—the so-called shock approach—is necessarily required. As we have learned from the experiences of Poland and then Russia, for example, such tight stabilization