Eastern Europe: economies in transition - Business Environment

The political and economic disintegration of eastern Europe in the late 1980s provides an excellent historical example of the difficulties faced by states moving from one form of economic system to another.

Prior to the collapse of the old order, the communist states of eastern Europe had systems of centralized state planning basically of the type described above, although some countries, especially Hungary, were experimenting with various forms of free enterprise. Growing dissatisfaction with the command system, and in particular with its failure to deliver living standards equivalent to those being enjoyed at the time by most citizens in the market economies of western Europe, gave rise to demands for reform, and these were translated into political action with the election of Mikhail Gorbachev to the post of Soviet leader in the mid-1980s. Gorbachev’s program of economic reconstruction (perestroika) signalled the start of a move towards a more market-based economic system and this was bolstered by his commitment to greater openness (glasnost) and democratic reform. By the late 1980s and early 1990s, the old Soviet empire had effectively ceased to exist and the newly independent states, almost without exception, had committed themselves to radical economic change of a kind unthinkable just a few years before.

For states anxious to move from an entrenched system of state planning to a market-based economic system, the obstacles have proved formidable and have helped to slow down the progress of economic (and political) reform in some countries. Among the problems faced by eastern European countries in the transitionary phase have been:

comparitive economic indicators



The need to create a legal and commercial framework to support the change to a market economy (e.g. company laws, laws on property rights, competition, external trade, the development of an appropriate accounting system).The need to establish different forms of free enterprise and to develop financial institutions capable of providing risk and venture capital, at commercial rates of return.
_ The need to develop truly competitive markets, free from state control and protection.
_ The need to liberalize labour markets and to develop entrepreneurial skills in a
workforce traditionally demotivated by the old bureaucratic system.
_ The need to allow prices to move to levels determined by market forces, rather than by political decision.
_ The need to achieve macroeconomic stability as markets become more open both internally and externally.
_ The need to reduce the burden of international debt.
_ The need to attract substantial overseas investment to assist in the rebuilding of the collapsed old socialist economies.

Meeting these requirements has not been made any easier by economic collapse and the perceived need on the part of some reformers to bring about rapid economic change whatever the consequences. In Russia, in particular, widespread bribery, corruption and criminal activity have helped to undermine an economy struggling with economic and political instability that appears endemic.

Eastern Europe a compparative risk analysis

Evidence suggests that, given these and other requirements, the process of systemic change is destined to be long and painful and will be subject to political as well as economic developments, many of which are as yet unpredictable. Central to this process will be the attitude of western countries towards such issues as debt relief, financial assistance, investment and other forms of help, and perhaps understandably the approach thus far has been relatively cautious, particularly given the relative uncertainty that comes from dealing with countries historically perceived to be adversaries. For example, a contemporary analysis by the accountants Ernst Young in 1992 suggested that the uncertainty was at its greatest in countries such as Russia, Ukraine and Albania and at its least in Hungary, the then Czechoslovakia and Poland, where reforms were often further down the road. Hungary’s high notional score, for instance, was justified by its relative degree of political and economic stability and its favourable attitude to foreign investment, backed by a legal framework to encourage it. In contrast, in Albania one of the most rigid of the old communist regimes political and economic instability, limited business opportunities and a reluctance to change were seen as consider able obstacles to involvement on the part of western companies and governments.

With regard to western corporate involvement, in practice this has taken a variety of forms including direct acquisition, joint ventures (which tend to carry tax advantages) and the development of local distribution networks, and much of it has been undertaken by multinational companies seeking to establish market share and to gain low-cost production sites. Coca-Cola, Pepsico, Levi Strauss, Philip Morris, BAT, Mars, Unilever, McDonald’s, Procter Gamble and General Electric are just some of the organisations that have sought to take advantage of the growing demand for western consumer goods, and Hungary, Poland and the former Czechoslovakia have proved the most favourable locations for much of the investment.

How this interest in eastern Europe will develop in the future is still open to question, given the political developments in the Balkans and in the former Soviet
Union and because of the severe economic problems arising from the move to a market-based system (e.g. hyperinflation). Some observers believe that in the circumstances a policy of ‘wait-and-see’ is the best option for western companies looking for market expansion at a time of lower growth in their traditional markets.
Others have argued that the risks involved are far outweighed by the potential benefits and that businesses willing to take a long-term view and commitment will

come to dominate some of the fastest growing markets of the future, at the expense of competitors who are more cautious or conservative.2 The case for the optimists has undoubtedly been strengthened by the recent process of enlargement within the EU.


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