ABSTRACT
The collapse of the Soviet Bloc and political liberation of countries in Central and Eastern Europe triggered a series of economic reforms, which together are often described as a transition from a centrally planned system to a market economy. This transition process had a fairly similar starting point in terms of institutional design: absolute prices were centrally fixed, which caused relative prices and incentives to be distorted. The optimal speed of transition (OST) framework has received considerable attention from the academic community and has frequently been used as an explanation for the rapid growth of unemployment in many transition countries: privatization that was deemed ‘too fast’ or ‘too slow’ was believed to explain the immediate hikes in unemployment in Bulgaria, Poland and Slovakia. In the centrally planned economy, overemployment was prevalent. The consensus estimate of labour redundancy ranged between 20% and 30% of total employment in Central and Eastern European countries.
