2 Fundamental Issues for Transition Strategies

2-1 Introduction: Relevance of “Structural Adjustment”

It seems that policy advice for ‘transition economies’ or former centrally planned economies in transition to a market economy had been based on multilateral agencies’ experiences in many developing economies such as those in Latin America. Many Latin American developing economies had suffered from serious economic troubles with heavy external debt, which itself was regarded as resulting from both external shocks and domestic mismanagement.

Developing economies had suffered from the same or similar kinds of external shocks and domestic mismanagement during the 1980s. Most of these economies were hard hit by oil price hikes, declining primary commodity prices, higher international interest rates, and the slowdown of developed economies' imports. Most of their policy authorities coped with these situations through external borrowing and enlarged budget deficits, resulting in heavy external debt overhang and implicit or explicit domestic inflation. These economies have been advised to take decisive measures for short-run stabilization and long-run structural adjustment as conditionalities imposed on their borrowing from the multilateral agencies.

Such transition economies as those in Eastern Europe also shared some features of economic difficulties in common with those Latin American economies. In fact, some of them were hard hit by a series of external shocks in the early 1980s and joined the group of heavy debtors along with some Latin American economies. The Eastern European economies, in particular, can be also categorized as middle-income developing economies as can some Latin American economies. In fact, they had attained certain levels of per capita income, education and public health. Therefore, there is a reason to draw lessons from the experiences of middle-income developing economies like in Latin American for Eastern Europe and to give a similar line of policy prescription for their economic reforms.

More generally, the application of policy prescriptions for developing economies to former centrally-planned economies has without doubt some reasons. They share in common the objective and means of economic reforms. They aim at both short-run economic stability and long-run development by controlling domestic inflation and opening up their economies to the rest of the world.

Recently, however, more people have become doubtful of the effectiveness of this type of policy advice. The doubt comes from two fronts. First, it has become a target of hot debate whether the structural adjustment policy in practice is effective in the different contexts of a variety of developing economies. This may be rather technical. Second --- and more important here --- it has become less clear whether this type of structural adjustment policy can be easily applied to these transition economies. In fact, recently, we have heard more and more arguments against straightforward application of policy prescription designed for developing economies in general to former centrally-planned economies $ ^{1} $ .

First, because they were under the CMEA regime, the degree and timing of those external shocks were different for the former CMEA and the other developing economies. In particular the collapse of the CMEA regime gave a deep-rooted blow to the member economies.

The CMEA regime was a system of intra-regional trade based on distorted prices. Once