WASHINGTON, DC – What a difference 25 years can make. In 1989, Central and Eastern Europe embarked upon a historic transformation, from authoritarian communism to democratic capitalism. With memories of the old system already beginning to fade, it seems fitting to look back at the region’s achievements, review the lessons learned, and examine the challenges ahead.
It would be a mistake to assume that the success of the region’s transformation was inevitable. At the close of the Cold War, Central and Eastern Europe’s economies were burdened by pervasive state ownership and concentrated investments in heavy industry. Fiscal and monetary policies had focused on boosting industrial growth, without regard to macroeconomic balance, resulting in chronically excessive demand and widespread shortages. To make matters worse, most of the region – Czechoslovakia being a notable exception – was plagued by unsustainable external debt and soaring inflation.
Meanwhile, few economists or policymakers had the background needed to tackle the complex tasks ahead. Such was the scale of the necessary transition that neither modern macroeconomics, nor the International Monetary Fund’s nearly 50 years of experience, offered much guidance. The challenges to be overcome were daunting, and many thought it would be impossible.
Instead, four key ingredients contributed to successful transitions. First, courageous politicians and policymakers took on the challenge of designing crucial reforms and explaining their consequences to a public that was understandably wary. They understood the historic nature of the task and embraced the challenge.