8 - External Shocks and the Catching-up Process

Summary

The strongest argument, both economic and political, behind the rationale to push towards postsocialist transition to a market system is a widespread conviction that such a system must bring better allocative efficiency and hence higher competitiveness. In due time it must bring higher output and eventually a better standard of living for the people. Yet to accomplish such a result, not only the pre-transition level of output must be recovered—and even reaching this target in some countries will take another decade or two of hard work—but these economies must be put on the path of quick growth. Furthermore, it must be sustained for a long period of time. Only then there will be a chance for catching-up in transition economies. Catching-up means a gradual, long-lasting process of diminishing the development gap between the richer industrial countries and the transition economies that are lagging behind them, now even more than ten years ago.

While looking into the future, there is always a temptation to presume that it will be fine. Such optimism may seem reasonable from the policymakers’ perspective, especially since they always assume that they well know what ought to be done and that unfavorable external shocks, making their ambitious plans impossible, will not happen. Unfortunately, quite often neither assumption holds. Consequently, the future seldom looks as bright as envisaged only a couple of years earlier. Despite such experiences, the optimistic expectations tend to be repeated time and again. And the postsocialist transition economies and their leaders are not exempt from this optimism. It might be added that international organizations are following this pattern of behavior as well, or at least they have done so for several years (World Bank 1997c).

There would be nothing wrong with optimistic expectations, if only they were based on vast knowledge and true commitment to sound policies on the one hand, and if they were drawing the right conclusions from historical experience, on the other. Otherwise, too much optimism becomes too much ignorance, which always prevents fast growth and its sustainability. Therefore, the considerations about catching-up in transition economies should draw from both their own recent experiences and the characteristic of the growth process occurring elsewhere in the global economy.