Introduction

As the citizens of Eastern Europe and the former Soviet Union (EESU) are rapidly discovering, transition involves a good deal more than adherence to the dogma of privatization and market forces: increases in personal freedom have not been accompanied by spectacular increases in the standard of living. Instead there is a recession in the region: demand has fallen, intra-EESU trade has collapsed, unemployment is rising, and fiscal deficits, debt and inflation have become problems. The challenge is to build on the new freedoms of economic agents to generate welfare improvements and growth in EESU countries.

The recent experience of Poland, Czechoslovakia (CSFR) and Hungary has shown that macro stabilization, price liberalization and a minimum degree of convertibility can be achieved rapidly. The more complex and fundamental issues of restructuring and privatization have yet to be properly addressed. These two processes in many ways define transition. The scope of the challenge is unprecedented in history and the costs of making these deep adjustments will be very large. Success in maintaining stability in the macro sphere and in pushing the overall reform process forward, however, depends on advances in these areas. Microeconomic reform now represents the central challenge of transition in EESU.

Our focus in this paper is on privatization, restructuring and foreign direct investment in EESU countries.