An Update on Reform in Eastern Europe and Russia

The paper reviews the experience of Poland and Russia with economic reform, with occasional comparison to China’s experience. The author argues that macroeconomic chaos in Poland and Russia preceded reform and was allayed by reform; that there is no necessary tradeoff between reform and growth, and that the Polish and Russian experience shows that it is possible to create clear property rights quickly. JEL Classification #s: Eo, 05, P2. I am honored to be here today, especially in Hainan, where the fruits of China’s economic reform are most visible. As a non-specialist in China, I plan to follow my obvious comparative advantage, by limiting my remarks to an update on the ideas motivating reform in Eastern Europe and Russia, and the results achieved thus far. Radical reform in Eastern Europe has been going on for three years, and in Russia, for one and a half. Compared with China, some obvious differences include the speed of reform and the enormous political change. In addition, the initial conditions were different. These are urban industrial societies, whereas China can draw on a vast, underemployed agricultural labor force and can thereby build up new sectors without necessarily tearing down the old ones. Furthermore, Eastern Europe and Russia were already in the midst of macroeconomic chaos. Reform did not create that chaos; it was inherited. Shock therapy does not create inflation and instability, but seeks to allay it. Let me begin with Poland. As regards the objectives of Polish reform, there are three strongly held positions. First, Poland’s objective is to become a member of the European Community (EC), with an industrial market economy like those in Western Europe. This will require, for example, adopting over 7000 regulations and laws as a prerequisite for membership, and an ownership structure like the rest of the EC, in which no more than 15-20 percent of the economy is state-owned. Second, Polish reform aims at deep structural adjustment, not just economic growth, because of the Stalinist legacy of over-developed heavy industry. This requires a drop in heavy industrial output, to free up resources for light industry and services. (In China, by contrast, rural reform freed up agricultural labor, obviating the need to shrink heavy industry directly.) And lastly, Poland’s reform had to eliminate macroeconomic instability-an inflation rate of 54 percent per month in October 1989, immediately after the new government was sworn in. Poland’s reform strategy stressed speed: rapid legal reforms, freeing up prices, ending the deficit, to achieve a market economy within five years and membership in the EC by the year 2000. Thus as of January 1,1990, almost all price controls, subsidies and trade barriers were eliminated, and in mid-1990, a rapid privatization campaign began. This had the effect Direct all correspondence to: Jeffrey Sachs, Depmnt of Economics, Harvard University, Cambridge, MA China Economic Review, Volume 4, Number 2.1993, pages 85-87 Copyright