PATTERNS OF TRANSITION FROM PLAN TO MARKET

The transition from a planned economy to a market economy involves a c omplex process of institutional, structural, and behavioral change. Th is article develops an index of economic liberalization and analyzes i ts interaction with growth and inflation, using data from twenty-six t ransition countries for 1989-94. The article reveals two paradoxes of transition. First, the attempt to maintain output by subsidizing enter prises results in larger declines in output than occur tinder a policy of reducing subsidies. Second, price liberalization results in lower inf;ration than occurs under a policy of continued price controls. Str ong common patterns exist among countries at similar stages of reform. The common legacy and the associated changes that result from initial disruptions in the socialist economic coordinating mechanisms and sub sequent liberalization measures go a long way toward explaining the tr ansition experience. Because strong interactions between liberalizatio n and stabilization are likely, stabilization becomes a priority for t he resumption of growth.