economic performances across transition economies. Initial conditions are not the sole factor that can explain the above performance gap. In fact, policies and/or strategies undertaken in transition economies were known to be diverse over a few aspects. We focus on 1) the pace of reform, 2) the role of government, and 3) regional externalities.

### 2 -4-1 'Shock Therapy' vs. 'Gradualism'

There has been a lot of debate on whether the 'big bang' approach (or the 'shock therapy') is a useful strategy to tackle the difficulties these transition economies are confronting.

On average, it seems that those who have studied the recent Chinese reform experience tend to be in favor of a 'gradualism' approach instead of the 'shock therapy' as a strategy toward market transition (see, for example, McKinnon [1994]). They assert that the gradual approach can be successful in building an efficient industrial structure both for non-state and state-owned enterprises. Therefore, they say, "a 'Big Bang' is not necessary for economic reasons, unless addressing initial macro-imbalances justify it." It has been even claimed that Eastern Europe and the former Soviet Union could learn from the Chinese experience in view of their disastrous results from the Big Bang.

A majority of those who have observed and advised the transition economies in Eastern Europe and the former Soviet Union have strongly refuted these claims above (see Aslund [1994], for example). They say, first, that the above argument against the Big Bang is ignorant of the difference in initial conditions and political regimes given to each individual transition economy, and, second, that the gradual approach had already been undertaken in Eastern Europe and the former Soviet Union and completely failed. They even claim that “the lessons will continue to flow to China from the market economies, including the fast reformers of Eastern Europe such as Poland, rather than in the other direction.” (Sachs [1993]).

Generally, however, we know that lessons could be drawn from either side in both positive and negative senses. Also, we know that there are fields where we need radical and decisive actions, but political constraints do not always allow them. Good reform packages should, without doubt, take these constraints into consideration. Sometimes, therefore, a gradualism approach must be resorted to at least as a second-best strategy.

More than that, of course, there are fields where we need a step-by-step approach instead of one-time big changes. Regarding institutional reforms such as judicial and accounting rules, they would naturally take time, which would also be the case for the establishment of private property rights in transition economies. This line of argument has much to do with a general issue of ‘sequencing’ of economic liberalization policies in developing economies in general.

There seems to be a consensus in understanding that macroeconomic stabilization through monetary control and fiscal reform should come first and at once, but that domestic financial liberalization should be implemented in a gradual and cautious way. But we have not found a consensus on an appropriate pace of trade liberalization.

To sum up, there is no solid rationale for the validity of either overall shock-therapy or overall gradualism for developing economies in general including transition economies. So