liberty over economic affluence. Thus in Eastern Europe drastic changes in the political system occurred and the dictatorship of the communist party collapsed. However, such drastic political change brought about confusion in the economy.

To the contrary, in Asia economic reform is leading the transition. The people of Asia seem to be demanding economic development rather than political democratization. As a consequence gradual but steady economic reform has been implemented under the continuing dictatorship of the communist party.

Some argue that without political reform, real economic reform cannot be achieved. But the facts suggest that drastic political reform sometimes brings confusion to the economy; it is possible that economic reform can proceed gradually but steadily under political continuity.

The second point is geographical location. Asian transitional economies are located in the dynamic developing area of the Asia-Pacific. Thus Asian transitional economies can expect a large spillover effect from the region by adopting open policies. China's open policy since 1979 has greatly contributed to the development of the costal area of China, and Vietnam is now making good efforts to attract foreign direct investment.

In Eastern Europe, however, the collapse of the CMEA affected and they could not make use of the merit of the economic openness.

The third point which characterizes the transitional economies in Asia is that they are not only transitional economies but also developing economies. The reforms taking place in these economies therefore have two aspects: reforms as transition measures and reforms as development policies.

In these economies the development of heavy industries is limited; light manufacturing and agriculture occupy a large part of the economy. Those small manufacturers and farmers are more responsive to the market than the huge heavy industrial enterprises which are used to the easy situation of the planned system. It may be possible to say that those light industries and agriculture in the Asian transitional economies helped absorb the shock of the reforms by actively responding to the market, while in Eastern European economies a sharp decline in the production of heavy industries were observed.

It should be mentioned that Mongolian background conditions are more similar to those of Eastern Europe than those of other Asian transitional economies. Mongolia experienced a drastic change in its political system and is geographically disadvantaged, with a land-locked territory far from the dynamic Asia-Pacific. It is interesting to point out that Mongolia is facing the same kind of difficulties as Eastern Europe, such as drops in production (see Chart 1-II-2), hyper-inflation, etc.

## 3 Historical Review

## 3 -1 Reforms carried out in the transition process

Reforms were carried out in many mutually related areas. For example, tax reform, which aims at reducing the distortions associated with irrational tax structures, also has a significant impact on fiscal consolidation, which is badly needed to restore macroeconomic balances.

In what follows, we will review the policies taken in each of the countries analyzed here.