At a joint CEPR lunchtime meeting with the Commission of the European Communities held in London on 25 July to mark the publication of Special Edition No. 2 of European Economy (see box), Jorge Braga de Macedo spoke on the essential conditions for these countries' current economic reforms to endure. Professor Braga de Macedo is on leave from the Universidade Nova de Lisboa as Director of National Economies in DGII (Economic and Financial Affairs) of the Commission of the European Communities. He is also a Research Fellow in CEPR's International Macroeconomics programme. Financial support for the meeting, which formed part of CEPR's research programme on Economic Transformation in Eastern Europe, was provided by the Commission of the European Communities under its SPES programme. The views expressed by Professor Braga de Macedo were not those of CEPR, which takes no institutional policy positions.

Braga de Macedo maintained that in all six countries far-reaching economic and political reform efforts had begun in the last eighteen months, thus setting the clock at `time zero'. Nevertheless, the new market economies' present standing does not imply that they can achieve all the necessary reforms simultaneously. These reforms will entail major administrative and legal changes, which will require `robust sequencing' to ensure their survival in the face of severe shocks. The guiding principles of the European Community's assistance programmes have been to help the recipient countries to help themselves, to pave the way for private foreign investment to become the major source of external financing, and to apply political and economic conditions to make their commitment to casting off the old system irreversible. While this irreversibility is essential, it cannot suffice to sustain these countries' progress towards fully-fledged market economies; and the Community is now concentrating its efforts on the task of helping to ensure that their reforms will endure.

Braga de Macedo noted that restructuring has received less attention to date than stabilization and liberalization in the transformation of the economies of Central and Eastern Europe, where both the privatization of existing state-owned enterprises and the setting up of new private firms are proceeding only slowly. The development of new private sector activity has been hindered because investment and especially foreign investment has been deterred by the uncertain economic, financial and institutional environment. The slow pace of privatization means that much of the economy will remain in state ownership for some time to come; but little has been done to alter the behaviour of state-owned enterprises. Nor have labour market policies been adapted to facilitate the extensive reallocation of labour that restructuring will require.

Braga de Macedo noted that in designing robust sequences of reform measures the international policy community had underplayed the significance of the absence of markets, which had resulted over several decades in vast and pervasive distortions that ruled out quick supply-side responses to macroeconomic measures. In the countries of Eastern Europe, the sheer size of tasks such as privatization and the development of a suitable institutional framework were underestimated by all concerned.

Restructuring by adapting these countries' productive structures to enable them to function as market economies encompasses developing a private sector, creating appropriate institutions for market relations, and changing the behaviour of enterprises and individuals. Those who want to assist East European policy-makers can help to ensure that the need for gradualism is not used as an excuse for procrastination by supporting restructuring through technical assistance, for instance in the fields of training and financial infrastructure, where much is already being done under the PHARE programme and by the G-24.

In the so-called `Europe agreements' currently under negotiation with Czechoslovakia, Hungary and Poland, as well as in the coordination of G-24 assistance to all six countries, the Community is pursuing a threefold approach of law, trade and conditional aid. First, the harmonization of laws (on matters such as company law, accounts and taxation, financial services, competition rules, health and safety at work, consumer protection, the environment, indirect taxation, technical rules and standards, transport, and intellectual property) is required to allow the associated countries to enjoy all the benefits of the single market. Second, the Community and its member states are also committed to providing the greatest possible market access for products from Eastern Europe. Third, political and economic conditionality of G-24 assistance, supplemented by adjustment programmes agreed with the IMF, has been explicitly required to sustain the reform effort.

Braga de Macedo noted in conclusion that the countries of Eastern Europe are tackling an unprecedented challenge in facing profound political and economic changes simultaneously. They enjoy the potential advantages of proximity to the Community and a strong desire to integrate with it, which the Community can help to realize by serving as an anchor for the reform process. Involvement in institution-building, provision of market access and conditional assistance are the three most effective ways for the Community to help ensure that the current efforts of the new democracies of Central and Eastern Europe result in enduring reforms.