At a lunchtime meeting on 22 July, Dariusz K Rosati presented results of recent research on the current transformation in Central and Eastern Europe, with particular attention to recent Polish experience. Rosati is Professor of Economics at the Warsaw School of Economics, currently on leave as Senior Economic Affairs Officer at the United Nations Economic Commission for Europe, Geneva. His remarks were based on his CEPR Occasional Paper No. 6, `The Politics of Economic Reform in Central and Eastern Europe'. Financial support for the meeting was provided by the Ford Foundation as part of CEPR's research programme on Economic Transformation in Eastern Europe, which is also supported by the Commission of the European Communities. The views expressed by Professor Rosati were his own, however, and not those of the above organizations nor of CEPR, which takes no institutional policy positions.

Rosati first contrasted the spirit of enthusiasm and hope with which these economies embarked on their transition to market- based democracies in 1989 with the pessimism, frustration and disappointment that prevail today. All these economies have experienced much deeper recessions than they anticipated when they initiated their transformation programmes, which have led to marked changes in their social and political environments. These economies exhibited several peculiar features that contribute to their continued political instability. Central planning did not fail because it was rejected it on ethical grounds, but rather because it was unable to compete with capitalism economically; these countries' populations may therefore have been less willing to abandon behaviour and assumptions dating from the socialist period than the survivors of many regimes overthrown by historically comparable `revolutions'. Also, given their histories of previous unsuccessful reform attempts, removing only one distortion for example, by granting autonomy to enterprises while price controls remain in place need not improve economic welfare. Eastern Europe's transformation also involved not only a political rejection of central planning but a nationalist revolution as well, as demonstrated in Yugoslavia and recently in Czechoslovakia, while the rejection of Soviet hegemony was also politically significant even in `homogeneous' countries such as Poland.

Rosati noted that Eastern Europe's revolution was historically the first to be motivated by demands from below for greater efficiency rather than equality although few then believed that income distribution would get worse. Nor was it a response to absolute degradation (since Eastern Europe experienced neither large-scale homelessness nor famine), but rather to the decline in relative living standards vis-à-vis the West. There has therefore been less pressure for change in Russia and China, which are less exposed to `consumer' influence than the countries of Central and Eastern Europe.

Rosati noted that the transformation initially enjoyed the support of virtually all social groups; this coalition was based on shared past experience rather than shared goals, however, so it contained the seeds of its own destruction. Once the former regimes collapsed, there was consensus neither on the choice of market economy whether to follow the Anglo-Saxon, `German' or `Scandinavian' model nor on income distribution. Eastern Europe moved rapidly from a `socialist Utopia' to a `market illusion': that increased efficiency is attainable without reducing the region's high levels of income equality or job security. The resulting clash between expectations and reality, between illusions and market rules, inevitably led to political instability, which may put the region's reform process in jeopardy.

Rosati noted that farmers and wage earners formed the main supporting force for the transformation in most of these countries, but they have also been the major losers after two years. The transformation will only improve economic performance in the longer term; the closure of old, inefficient activities takes place much more rapidly than the creation of new, more efficient production. In the mean time, rapidly rising prices, falling real wages and massive unemployment have eroded popular support for the necessary reforms. The resulting accelerated disintegration of the new governments' socio-political base is the greatest challenge now facing the new democracies of Central and Eastern Europe.

Conflicting interests should in principle be accommodated through parliamentary procedures; but democratic institutions and practices are rudimentary and there are no established patterns of negotiation and cooperation among political parties. Rosati suggested three possible alternative courses of events. First, a `social pact' may be reached among the main social groups, essentially outside the parliamentary process; but such a `corporatist' set-up could undermine popular confidence and trust in newly established democratic institutions. Second, a continuation of current practices could lead to a series of partial reforms following the Latin American model. Third, if the new political elites are unable to reach a consensus over how to distribute the costs of the transition, a reversion to authoritarian rule may follow.

Whether such negative outcomes can be prevented depends on whether the new political elites can go through the first stage of transformation without requiring too much sacrifice from too many; for this external assistance will be essential, but certainly not sufficient. The recent experience of Central and East European countries demonstrates that policy-makers must show greater flexibility and imagination than they have so far. The liberal policy course must be maintained to establish a sound market system, but doctrinaire liberalism could be just as dangerous politically as the previous system of doctrinaire interventionism.