chapter  4
40 Pages

TRANSITION TO A MARKET ECONOMY

Political change has opened the way for radical economic reform to transform the discredited system of central planning (Havlik 1990; Myant 1993). But economic restructuring requires much more time than revolutionary political upheaval and few East Europeans realised just how challenging the process would be (Somogyi 1993). Perfecting a market economy after decades of central planning is a major task complicated by unemployment and capital shortage (Csaba 1991, 1995). Fundamentally, the switch to a market system requires a relaxation of state controls (evident only just before 1989 through the greater enterprise autonomy allowed under the Hungarian NEM), the breakup of large monopolies and encouragement of private businesses (Batt 1988; Fischer and Gelb 1991). But while there is no doubt about the ultimate objective of a market economy, there is disagreement over the best way to proceed, including the role of the state during the early stages when there are severe problems of unemployment and inflation (Brada 1993). Typically, there has been a fall in GDP (reflected in both agricultural and industrial production) because of the reduced demand when international trade is freed and imports cease to be restricted to state barter agreements (Table 4.1). The effect of free market rejection of much of the old planned production has been accentuated by greatly reduced buying in the FSU (Dawisha 1990). But market incentives are gradually beginning to make an impact and production should eventually rise to higher levels than before. However, much will depend on international competitiveness and the consequent inflow of foreign investment; so policies for restructuring are of crucial importance.