Economic and Social Costs of Transition: A Hard Look at Soft Facts

Abstract

Experience in developing countries of adjustment to macroeconomic imbalances and price distortions showed that some short-run costs were inevitable before improvements came. This accords with the economic theory of market equilibrium, that before investors, producers and consumers can react optimally, they need to have equilibrium price signals, but these come only after some period of trial and error. During this period there may be severe welfare costs as restructuring and reduced government support result in job losses, cuts in social services and a widening of income distribution differences. This was expected, but what was not predictable in advance was the magnitude of these costs, their burden on different groups, and their duration. This chapter will present the best available information on such costs over the period 1989 to about 2003–04. The main findings are three. First, these costs occurred in all countries and their magnitude ranged from significant to enormous. Second, the evidence also shows that many early assessments overstated the costs, partially because they were done too soon, at the mid-1990s bottom of the transition recession, and partly because of data biases. Third, the evidence shows these costs varied considerably across countries, with the faster reformers experiencing much lower negative effects, and over time even with lagging reformers having generally bottomed out about 1995 and reversed direction.