Introduction

The demise of communism in Central and East European countries (CEECs) has set the European continent on a path of rapid change, challenging economic policy makers not only in post-communist countries themselves but also in Western Europe. Having rid themselves of communist governments in 1989–90, people in the CEECs soon faced dubious rewards. Their economies experienced an unprecedented crisis, with successive double-digit annual reductions in real GDP and mass unemployment. Lacking both previous historical experience and an accepted theory of systemic transformation, observers had a hard time interpreting what was going on. Was it an unavoidable prelude to the formation of a capitalist system, something along the lines of Schumpeter's creative destruction? Were these countries actually heading towards a capitalist system of the Western type, or were they trying to go for some idiosyncratic mixture of communist–capitalist society? In the meantime, economists more or less unanimously agree that the CEECs will eventually emerge as market economies of the Western type, and that they will do so to their own great advantage. However, controversy still dominates as to the detailed policies of transformation. This holds true in particular with respect to privatization and industrial restructuring, while historical experience and theory seemingly offer somewhat more guidance on issues of macroeconomic stabilization.

Given the necessity of immediate action, it is not surprising that much of the discussion has so far centred on policies pertaining to systemic transformation, as for instance evidenced by Clague and Rausser (1992), and Blanchard et al. (1992).