ESAF Review Assesses Macroeconomic Adjustment in Transition Economies

• Pages: 63-64

Page 63

The demise of central planning and the transition to a market-based economy began at different times for the six transition countries under review: in 1986 for the Lao People's Democratic Republic, 1989 for Vietnam, 1990 for Mongolia, and 1992 for Albania and the Kyrgyz Republic; Cambodia-still struggling with armed internal conflict-did not undertake comprehensive adjustment until 1993. ESAF-supported programs began in 1993 and 1994 in all but one of the six countries. The Lao People's Democratic Republic, the exception, began adjustment under an SAF arrangement in 1989, followed by an ESAF arrangement in 1993. In many respects, ESAF-supported programs in these countries continued and deepened adjustment efforts that had been initiated at the beginning of transition.

SAF/ESAF-supported adjustment programs vary widely in their emphasis and detail. Nevertheless, countries' common problems and the underlying aim of achieving higher sustainable economic growth have resulted in reform strategies that share core objectives, including:Page 64

- raising saving rates;

- securing macroeconomic stability;

- liberalizing and opening economies to foreign trade;

- reducing government intervention and promoting well-functioning markets;

- reorienting government spending and restructuring revenues; and

- mobilizing external resources. Although their strategies included the same core elements as in other ESAF countries, adjustment programs in the six transition economies tended to place greater emphasis on rapid stabilization, strong fiscal adjustment, and the dismantling of state dominance, consistent with their different circumstances.

Stabilization

Rapid stabilization-a central objective-was to be achieved mainly through strong fiscal adjustment and tight control of credit, particularly to public enterprises. Stabilization efforts were most successful in Albania and the three Indochinese economies, all of which reduced inflation to low levels, initially through a credit-based approach backed by wage controls. During 1992-95, following initial stabilization, Cambodia, the Lao People's Democratic Republic, and Vietnam maintained stable nominal exchange rates through tight fiscal and monetary policy. Although the Kyrgyz Republic and Mongolia also made notable progress in reducing inflation in 1994-95, their inflation rates remained relatively high (32 percent and 53 percent...