"From Stettin in the Baltic to Trieste in the Adriatic an iron curtain has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe. Warsaw, Berlin, Prague, Vienna, Budapest, Belgrade, Bucharest and Sofia; all these famous cities and the populations around them lie in what I must call the Soviet sphere, and all are subject, in one form or another, not only to Soviet influence but to a very high and in some cases increasing measure of control from Moscow. "1Winston Churchill spoke these famous words at the end of the WWII as Eastern Europe formed a communist buffer zone between the Soviet Union and Western Europe. However, by the 1980's it was obvious: the comparisons of England versus Estonia and Belgium versus Bulgaria bore no reasonable similarities other than one system was prosperous while the other was not - Eastern Europe was in shambles in comparison to its Western counterparts. However, the years 1989 - 1991 marked a crossroads in history -- This was the period of social uprisings in Eastern Europe.
During this time frame, the oppressive single-party regimes of Bulgaria, Czechoslovakia, Estonia and Hungary disintegrated. Resultantly, the need to transition to a democratic society arose because socialism failed to provide an effective method of structuring a functional economy. Unfortunately, the transition to market economies in Eastern Europe were much more cumbersome than originally anticipated. Why has the transition process been so arduous for countries like Bulgaria, while other former Socialist countries, such as Estonia, Hungary and the Czech Republic are already members of the European Union?In this paper I will focus on Bulgaria, Czechoslovakia, Estonia and Hungary and identify the reforms needed to transform a centrally planned economy into a functional democratic market. Identity The beliefs and opinions of a social group inevitably determine the level and intensity of conflicts in a certain country. If people with similar likes and dislikes characterize countries, then there is a high probability of society reaching a consensus and a small chance of conflict amongst people.
Thus, if a society is somewhat homogenous, there will most likely be a common unifying philosophy that will ensure solidarity and the spreading of social objectives. Moreover, is a country's population is homogenous; the gap between class differences is less distinct. A group's power position depends partly on the power of the individuals in the group and partly on the coordination of power resources inside the group. A high degree of resource coordination can give a group considerable organizational power.
2 Thus, effective coordination and cooperation within a country depends on the degree of similarity between individuals.The Czech Republic cannot be said to be incredibly accepting of other ethnic groups living within its borders. In 1918, when the Austro-Hungarian Empire collapsed after World War I, the Treaty of Versailles created a Czechoslovak Republic. 3 It is undoubtedly true that Slovakia was the beneficiary of this forced cohabitation with the prosperous Czechs.
The Czech's had always felt superior to the "educationally backward" Slovaks and saw this union as "a foreign attempt to join two very different peoples in a single state.However, in 1993 the Velvet Divorce took place and Czechoslovakia, who for many years considered Slovakia to be an economic and social burden, was divided into a generally ethnically homogenous Czech Republic and a somewhat less homogenous Slovakia. Furthermore, with the separation of the country, the Czech Republic was ecstatic that Slovakia inherited the majority of the unemployed Roma population; it helped restore ethnic homogeneity back to the Czech Republic. Hungary and Estonia are also nearly ethnically homogenous Countries.
Homogeneity of the countries implies that there are fewer foundations for disagreement on the issues regarding the economy and the like. However, in an ethnically diverse country, such as Bulgaria, market reforms will benefit majority groups while minority ethnic groups will be harmed and will actively resist such reforms. Price Liberalization An economy structured by central planning means that a state completely controls all economic activity, or in other words, centrally planned economies lack a private sector.As Dillon and Wyckoff clearly illustrate, experience with this system in the former Soviet Union and in Eastern Europe has shown that markets function inefficiently under central planning.
Furthermore, centrally planned economies lack a fundamental competitive nature and entrepreneurial ethos needed to create a prosperous and flourishing market. These are the inherent flaws of central planning and they have created a host of serious problems, such as price liberalization, that have affected both individuals and companies.Under central planning the state determines the price of goods, whereas democratic societies allow the market demand and supply to dictate the prices. In other words, a centralized bureaucracy distorts the price of market goods. As a result, goods such as food, rent, utilities and public transportation were kept low while "luxury" goods such as televisions, radios, and entertainment were kept artificially high.
5 As several ex-socialist countries, such as Bulgaria, the Czech Republic and Estonia have embarked on the transition to market-driven economies; one of the first steps they have taken is to set government determined prices free.Liberalization of prices is one of the most essential parts in the creation of a market. It is exactly these unfixed prices, which structure foundation of an efficient marketplace-- they reflect the demand of the consumers on the one hand and the costs and supply of the enterprises on the other. 6 When prices are liberalized, consumer preferences will dictate the correct product allocations through by consumer demand and available market supply. Resultantly, market prices will reflect consumer tastes and consumer utility will increase.Furthermore, with privatization, production becomes more competitive and the quality of market goods increases Most countries have been incredibly successful in implementing price liberalization policies.
In Estonia, steps towards "price liberalization began in 1989 and by the end of 1991, free markets were determining many product prices. " 7 Furthermore, price liberalization served to enhance economic growth and improve the variety, quality, and mix of products in the Estonian market place.Unfortunately for several former socialist countries, this step of price liberalization has resulted in high rates of inflation, or at least initially. Although prices have achieved some degree of stability in some ex-socialist economies, countries such as Bulgaria, are still attempting to bring inflation under control. High inflation means that the price system is sending signal that are uncertain.
In 1991, the Bulgarian government attempted to liberalize prices; however their attempt in implementing the proper liberalization framework was moot. The Bulgarians failed to liberalize energy prices and were heavily dependent of Soviet subsidized oil. In 1997 the Bulgarian currency collapsed and ended the supply of low-cost Soviet oil and dramatically resulted in increased domestic energy prices.Furthermore, the government failed to fully liberalized food prices and was significantly subsidizing the agriculture industry.
Ineffective stabilization policies, such as granting agricultural subsidies and artificially low energy prices triggered rampant hyperinflation in Bulgaria and in 1997 the lev was rendered worthless as a medium of exchange. Furthermore, price liberalization has not served to benefit everyone; in fact this process has negatively impacted many workers and consumers in Bulgaria, the Czech Republic, Estonia, and Hungary. The price of consumer goods increased drastically in the first few in executing price liberalization policies, as an economy attempts to transition to global competition. Moreover, the dissolution of the old system sparked falling wages and increasing unemployment in old industrial enterprises. PrivatizationCentral planning has left Bulgaria, the Czech Republic, and Hungary as countries with massive inefficient integrated industrial enterprises that simply cannot compete in on an international level. Most of these enterprises were forced out of business due to privatization and the withdrawal of state subsidies.
In these circumstances, policy makers faced a complicated decision; the elimination of such subsidies would force enterprises to shut down, while continuing to extend lines of credit to failing companies would only fuel inflation.This is still a major in problem in Bulgaria where "soft credits ... prop up inefficient state-owned enterprises".
However, in 1998 the practice of granting government loans to failing post-communist industries was reduced. 10 Furthermore, in addition to these problems, the archaic technologies and waste-elimination used by many SOE's (state-owned enterprises) in Central and Eastern Europe have resulted in major environmental damage and clean-up problems.For instance, many Bulgarians infuriated with the pollution of SOE's embraced "the ecoglasnot movement objecting to urban chemical pollution in the cities, especially the industrial and chemical center of Rousse and the spread of radiation from Chernobyl. "11 Why is privatization such an essential component in economic reform? First and foremost, privatization advances economic performance and helps promote domestic and foreign private investment--the means of support of reforming countries.
Moreover, privatization creates incentives for managers to use resources efficiently.However, many Eastern European markets have failed in privatization because the institutions needed to ensure democracy are underdeveloped - an efficient baking system, legal regulations, reliable information, etc. Czechoslovakia initiated its privatization program in 1991, at a time when the experience of other countries gave Czech and Slovak policymakers some useful insights that could be applied to the design of their own programs. 12 In particular, they noted that the population lacked the necessary information and capital needed to purchase assets.Furthermore, these policy makers recognized that other countries had experienced major problems in privatizing state-owned assets, especially large enterprises.
As a means of creating a framework for the rapid privatization of large state enterprises, the authorities created a voucher-based privatization system. Each citizen would receive vouchers worth 1000 points of investment money for and use these vouchers to bid for the shares of all companies that were being privatized under this method. 3 In the eyes of the Czech and Slovak policymakers, the voucher system had many unique advantages in. For instance, vouchers would enable Czech and Slovak citizens with no savings and no experience in evaluating stocks to become instant shareholders and instant participants in the country's fledgling market economy, which would enhance support for privatization among the general population.
Community support is important to the success of a privatization program.Most Czech citizens entrusted their vouchers to Czech investment firms that operated like mutual funds or investment trusts. 4 In spite of its benefits, the voucher program also had intrinsic flays serious problems due to the absence of law governing securities transactions. In fact in the Czech Republic "poor performance of the private sectors reflects in large part weak corporate governance that has resulted from ownership structures established in the voucher privatization program. "15 Furthermore, the Czech Financial market has been chastised for not providing an adequate framework for business activity since they have not had an Initial Public Offering since 1993.Privatization has also been a very successful undertaking in Estonia where the sell-off of small and medium sized enterprises is nearly complete and larger companies are almost all sold.
16 Estonia primarily has used domestic and foreign auctions and public offering of shares as their chief methods of privatization. In comparison to its former socialist counterparts, Estonia successfully managed to restructure government institutions and embrace the capitalist ethos resulting in massive amounts of foreign investment where "over 100 countries have invested in Estonia's private sector.Privatization has not been welcomed with open arms by all transition economies. Opponents to privatization and restructuring include industrial management in state-operated industry and political coalitions of communist supporters. Furthermore, many workers formerly employed by state owned firms pay high social costs under privatization.
Privatization involves job losses and the introduction of new work rules, which including longer hours and reduced benefits.In Hungary many were opposed to privatization for it was regarded as a system that favored foreign investors. In Bulgaria and Hungary, the nomenklatura, which included the managers of former state firms, was perceived to have too much influence in shaping privatization for its own self-serving purposes. In Estonia and many other countries, claims for restitution slowed the privatization process and created animosity between lawful property owners and existing property holders.To some extents, all transition economies in Eastern Europe have been unwilling victims of rent-seeking activities. Such rent-seeking behavior include delaying the privatization process of large SOE's, dissolving the firm, and stripping the existing company of all remaining capital assets.
Macroeconomic Policy Countries in transition often face high levels of inflation. Two ways transition economies can avert inflation include the creation of an independent central bank and the introduction of a currency board.Currency board is quite an intangible concept and is defined as a very safe and credible form of fixed exchange because a country's home currency is convertible against a fixed exchange rate with some other country's currency or a basket of currencies. The anchor currency is generally chosen for its expected stability and international acceptability. 18 Bulgaria instituted a currency board in 1997 per recommendations of the IMF.
Following the inauguration of the currency board, monthly inflation fell from 243 percent in February 5, 1997 to 5 percent in April 1997. 9 The Czech Republic was very successful in implementing fiscal stabilization policies. They devalued the koruna and pegged it to a basket of currencies, which included the dollar and the deutschmark. Estonia's currency board arrangement for the central bank was introduced in 1992 implied severe restrictions on the government's ability to loan large sums of money to failing companies. 20 First, currency board arrangements prevented the central bank from carrying out a "lender of last resort" role by providing a bank with liquidity.Under the rules of the currency board, the central bank must not conduct operations that affect the supply of base money In the Estonian case the currency board seems to have been an effective means to stabilize the economy and attract foreign investment.
Conclusion While popular support for demonstrations tumbled communist governments in Estonia, Hungary and Czechoslovakia in 1989, Communism never really ended in Bulgaria. Bulgaria has failed to implement the fundamental institutional changes needed to end corruption.Furthermore, Bulgaria remains a hybrid system comprised of remnants of central planning and statist mantras fused with defective democratic market and institutional reforms. Conversely, Estonia has been praised as a success story in transition. This transition has been motivated by the desire of Estonians to rejoin the West and distance itself from Russia politically and economically.
As a consequence, transition has proceeded mostly on a single track and a single direction: Estonia has rapidly adapted itself to Western values, standards and Institutions.