Eastern Europe 25 Years After the Fall of Communism

Visio Institut

The Visio institute has just published the second issue of The Visio Journal, which offers several papers analyzing the degree to which the public policies and political institutions of former socialist economies have been supportive of economic freedom following the collapse of communism, as well as what changes in economic performance of these countries occurred during the same period.

In doing that, the papers utilize data generated and published in credible sources, like the World Economic Forum, Fraser Institute’s Economic Freedom of the World Report, Freedom House’s Freedom of the World, Polity IV, Transparency International’s Corruption Perception Index, World Values Survey, Maddison Project Database, UNCTAD, Eurostat, and World Bank’s World Development Indicators, Doing Business, and World Development Indicators.

In their opening essay, James Gwartney and Hugo Montesinos take an in-depth look at 25 former socialist economies (Albania, Armenia, Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Poland, Romania, Russia, Serbia, the Slovak Republic, Slovenia, Tajikistan, and Ukraine) following the collapse of communism, demonstrating that, in many ways, the transition from socialism to markets has gone well. Trade liberalization, more stable monetary regimes, lower marginal tax rates, and deregulation have all contributed to the movement of the former socialist economies toward economic freedom. Further, they have grown rapidly, achieved large increases in international trade, attracted substantial foreign investment, and made progress against poverty. Furthermore, these countries have closed the income gap relative to the high-income countries of Europe and the world. Moreover, with only a few exceptions, these countries are now functioning democracies and government corruption has declined. However, these countries also have a major shortcoming: their legal systems are weak and little progress has been made in this area.

aaFollowing are five country-based papers analyzing the degree to which the policies and institutions of Poland, Czech Republic, Slovakia, Slovenia, and Bulgaria have been supportive of economic freedom following the collapse of communism. Aleksander Łaszek illustrates how changes in the ownership structure of companies in Poland affected productivity and GDP growth. With Polish corporate sector experiencing outstanding output growth during the past 25 years, more than 2/3 of this growth can be attributed to rapid growth of private companies, which resulted from both vibrant incentives for private owners and the opening of the Polish economy. Despite the visible success, there is still room for improvement in the Polish economy, as a stock of less productive, protected, state-owned enterprises remains sizeable.

Kryštof Kruliš examines specific features that have influenced the Czech Republic’s performance during this transition and what could determine Czechia´s economic growth in the upcoming technological revolution. Being at almost full employment, the growth paradigm of low wage economy has ended for the Czech Republic. The economy cannot grow further only by adding new production in newly built manufacturing plants. For the first time in the history of its transition, the Czech Republic can now focus only on attracting investments with higher added value and higher productivity.

In his paper, Martin Vlachynský argues that sound reforms mean a continuous process, not a one-time occurrence. After a Tatra Tiger introduced banking, tax, pension, labor code, healthcare, and other reforms in the 1998-2006 period, it attracted several prominent foreign investors and kick-started the sleeping economy. Following was a period of Slovakia’s abandonment of reform efforts by putting on a halt necessary reforms in the pension, social, and healthcare systems. At this point, it seems the decision makers in Slovakia are postponing the reforms until they will become inevitable.

Jure Stojan discusses the partial regressing of Slovenia along several dimensions of economic freedom, while notes that Slovenia was a noticeably freer country overall in 2015 than it was in 1995. Further, the paper compares the Slovene experience with that of other former Yugoslav countries. Finally, the paper reviews the major explanations put forward for the worsening performance of the rule of law in Slovenia. With several explanations being put forward, the old theory of the soft budget constraint offers new avenues of inquiry. It not only explains why it should have been the financial crisis that exposed backpedaling in the transition process but also provides a link between policy outcomes and public expectations.

In his paper, Adrian Nikolov explores the history, structure, and economic consequences of the currency board in Bulgaria, which was introduced as an emergency measure to combat the late-nineties economic crisis, though has stayed in place ever since. The paper explores the currency board introduced to remedy the economic crisis during the Videnov government, as well as its consequences for the reshuffling of the institutional setting and the stabilization of Bulgaria’s economy, in terms of inflation, gross domestic product, investment, public debt and stability of the banking system. Finally, the paper joins the present debate on whether the Bulgarian currency board should be abolished, arguing that it should not be reformed as the trade-off between economic and fiscal stability and freedom of monetary policy has been beneficial to Bulgaria.

Much can be learned from the transition from socialism to markets in Eastern Europe. One of the most vital lessons will be the role of government in a free society, especially the rule of law in protecting the rights of the people.

The publication may be downloaded for free at http://visio-institut.org/visio-journal-2/

Tanja Porcnik
Visio Institut