Ten Years of Transition: A Progress Report

• Author: Patrick Lenain
• Position: IMF's Resident Representative in Ukraine

It has been nearly ten years since the countries of Central and Eastern Europe and the former Soviet Union began the transition to a market economy. The radical changes required have made the process difficult and, at times, painful. Progress has been remarkable in a number of countries. But in others, successful market economies have not yet emerged.

SOON after the fall of the Berlin Wall in 1989, the countries of Central and Eastern Europe decided to end their isolation from the international community. They applied for membership in the IMF, the World Bank, and other multilateral organizations (Hungary, Poland, and Romania had joined the IMF several years earlier). The international organizations sent missions to the countries requesting membership to assess their economic situation and determine what their initial quotas should be. The various missions found major structural handicaps and weaknesses in the countries-the legacy of central planning and ill-fated reform attempts. These countries needed not only to stabilize their economies but also to create the institutions necessary to the operation of a market system.

Shortly thereafter, at the Houston summit in July 1990, the heads of state of the Group of Seven countries called upon the IMF, the World Bank, the Organization for Economic Cooperation and Development (OECD), and the designated president of the European Bank for Reconstruction and Development (EBRD) to cooperate on an economic analysis of the Soviet Union, whose economy was rapidly deteriorating. A Study of the Soviet Economy, published in 1991, found that financial, budgetary, and monetary conditions were alarming-especially the high level of external indebtedness. The subsequent dissolution of the Soviet Union brought additional economic imbalances to light.

Under the circumstances, nearly all 25 post-communist countries, far-reaching adjustment and structural reform programs were put in place. It soon became evident, however, that transforming planned economies into market ones while eliminating macroeconomic imbalances would be a formidable task. No attempt at such radical and rapid reform had ever been made before, so there was no previous experience to draw on. What has been accomplished in the nearly ten years since reforms began? How successful have these countries been in eliminating external imbalances, restoring monetary stability, and achieving integration into the global trade system? (For a discussion of structural reforms and economic growth, see "The Post-Communism Transition: Patterns and Prospects" by Julian Exeter and Steven Fries in this issue).

Reducing external imbalances

When they started their transition to a market economy, many post-communist economies had external imbalances in the form of heavy debt-service schedules (Bulgaria and Russia), depleted foreign exchange reserves (most former Soviet Union countries), or external payment arrears (Ukraine). These difficulties had been aggravated by the breakup of traditional trade linkages following the dissolution of the Council for Mutual Economic Assistance (CMEA). One of the functions of the IMF in the context of transition was to provide financial resources to make the process of external adjustment more orderly. The credits provided by the IMF, which amounted to about $27 billion during 198997 (Chart 1), were used to replenish international reserves, avoid the recurrence of external arrears, and ease debt-servicing difficulties. The first "wave" of IMF credits was released in...