ABSTRACT
This chapter reviews the case for structural adjustment in reforming socialist economies, noting in particular the need to forestall high levels of inflation. It argues that the importance of macro-economic stability extends beyond keeping economic aggregates in check. The chapter addresses the exigency of institutional adjustment, arguing that the lowering of transaction costs is as important to the success of reform as are the more frequently voiced concerns about production costs not properly reflecting comparative advantage. It highlights the reasons for lacklustre performance on part of centrally planned economies, and the implications for reform. As reforms were initiated, repressed inflation came out in the open, additionally fuelled in many an instance by drastic shortfalls of government revenue and hence increasing budget deficits. Macro-economic stability is a necessary but not sufficient condition; institutional adjustment is also a component crucial to the success of reform in formerly centrally planned economies.
