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Transition from Socialist to Market Economies Not as Smooth as Predicted

Thirteen years after the fall of the Berlin Wall triggered the collapse of Soviet-style communism in over two dozen countries, economists are drawing conclusions about what policies produced the best results in building market economies. Economists held discussions on the issue at the annual meeting of the American Economic Association in Washington.

The transition has not been as smooth as many predicted in the early 1990s. Jan Svejnar, who researches transition economies at the University of Michigan, says the speed and effectiveness of the changeover varies from country to country. However, Mr. Svejnar says almost everywhere foreign ownership has proven to be the most effective method of privatizing state-owned firms.

"Foreign owned firms or firms that were acquired by foreign owners to do better in terms of productive efficiency, in terms of allocative efficiency, in terms of restructuring in general than all other firms - including the firms that were privatized to domestic private owners," he said.

In Europe, says Mr. Svejnar, market based reform has advanced furthest in Slovenia, the Czech Republic, Hungary and Poland. Russia and the rest of the former Soviet Union have done less well.

"Then we have at the opposite extreme China. The communist system still being functional there. But economically, of course, they have done very well," he said. "They have 20 years of unprecedented growth whereas in Russia we have 10 years of significant decline followed by some growth in recent years."

Apart from China, only in Slovenia and Poland have per capita living standards advanced to well above the levels that prevailed in 1989.

Joseph Stiglitz, a Nobel Prize winning economist who teaches at Columbia University, says access to technology is critical to economic development. China, says Mr. Stiglitz, has been very successful in attracting technology-based investment. This, he says, translates into a rapid growth rate and a narrowing of the income gap with rich countries.

"What we will see is that there will be a convergence of countries in East Asia like China and South Korea, a relative convergence towards the United States. But in other parts of the world there will be divergence," he said.

Professor Svejnar of Michigan believes there is a convergence of income occurring in Europe, but at a much slower pace. "Those who said it will take 15 to 20 years [for central Europe to catch up with the west] were seen [in 1989] as incredible pessimists. That was almost heretical. Now we think 20 to 40 years from now is when some convergence will be highly visible," he said.

China this past year had a growth rate of at least seven percent. Russia registered about four percent growth, and central European countries about two percent.