Economic Reform and Structural Adjustment in East European Industry

IMF Working Papers, June 1, 1994

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A consistent set of disaggregated industrial output data for four Eastern European countries is examined to determine the extent to which structural adjustment has taken place since the initiation of market-oriented reform.
The market-oriented reforms created a massive relative price shock whose effects on the structure of the industrial sectors of these economies are analyzed.

The relative price shock from market-oriented reform produced relatively small changes in the structure of industrial sectors, at least one to two years after the reforms.
The evidence calls into question one argument in favor of more gradualist reform—namely, that more gradualism implies a smaller output cost in the short run.
By and large in these economies, the output cost associated with the removal of relative price distortions may still have to be faced.

The limited structural adjustment observed within the first one to two years suggests that delaying price liberalization to reduce short-run output costs may not yield the expected mitigation of those costs.
Policymakers should consider that removal of relative price distortions can entail substantial output costs that are not necessarily avoided by more gradual implementation.

Subjects: Economic sectors, Energy prices, Industrial sector, Inflation, Macroeconomic risks, National accounts, Prices, Public financial management (PFM)
Keywords: CMEA country, country, country-effect dummy, Eastern Europe, economy, Energy prices, factor, Industrial sector, industry effects f, industry factor, industry shock, Inflation, liberalization, Macroeconomic risks, state enterprise, state enterprise sector, WP

Source: Economic Reform and Structural Adjustment in East European Industry, IMF Working Papers 1994/080.