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The integration of Eastern Europe into world trade depends on both the evolution of Eastern European economies and the behaviour of Western countries. In Eastern Europe it is hoped that the transformation of economic systems that have revealed their inefficiency will eventually lead to improvements in the populations' living standards. The introduction of market mechanisms, that are supposed to best achieve the equilibrium between supply and demand, is currently under debate. The nature of ownership — private or public — does not in itself suffice to define the nature — capitalist or socialist — of the economic system; the associated mode of regulation is just as important and is not strictly determined by the nature of ownership. In order to switch from socialism to capitalism, Eastern European governments have had to select an option for the transition process, although the debate on this issue is going on. All countries have proposed or even already adopted the same measures: the creation of a private sector, the abolition of the centralized command system, price liberalization, the transformation of the banking system, and currency convertibility. Though all these reforms share a common inspiration — the eventual creation of markets for goods and services, for financial assets and for labour — , there are two distinct positions concerning the sequencing of reforms: the gradual approach and the shock therapy. The latter aims at an immediate break from the previous system, while the former seeks to introduce market mechanisms only progressively in an attempt to avoid too brutal a disruption of production processes and too high a social cost. The short-term impact of reforms is contractionary: production is disorganized by the inexistence of clearly defined decision units and by the expectation of privatization; living standards are curtailed by price liberalization and by the rapid rise in unemployment. The margins for maneuver of economic policies are strictly limited by the risks of hyperinflation, uncertainty about the way excess money balances will be used, and the burden of external indebtedness in some countries. At a medium-term horizon, it is hoped that the integration into world markets and the functioning of the newly created regulation mechanisms will allow for a rebound in living standards and an improvement in the productivity of capital. However whether the process succeeds or not depends as much on the reform options implemented in Eastern European countries as on the reactions of Western partners. What is required first is an increment in Western financial aid in order both to improve infrastructures and to finance demand. Technology transfers might then play a key part in sorting out obsolete industries and in stimulating growth in the whole economy. But there still is a great uncertainty about the amount and — geographical and sectoral — distribution of capital transfers. The positive demand shocks that Western economies expect to benefit from due to the opening up of a market of more than 400 million consumers cannot be very strong in the short run: potential demand is indeed considerable, but the growth of sales to the East is unlikely to develop regularly. The breakdown of COMECOM will fasten integration into world markets, but will also accelerate the différenciation amongst member countries. The balance of payments constraint of the six European countries will be exacerbated by payment in hard currency, instead of rubles, of energy imported from the USSR. The Gulf crisis thus aggravates the divergencies between the USSR, which is the world leader in oil production, and the other Eastern European countries, confronted with an energy bill hike that will curtail their possibilities of financing manufactured imports from the West. Two major conclusions emerge from the analysis. First, there do not exist such things as an Eastern bloc or a Western bloc. In Eastern Europe, the differences amongst countries tend to widen; reform implementation depends on governments' credibility and democratic support, which is not the same in all countries; once the disruptions caused by the changes in ownership and in regulations are over, economic growth may be expected to resume, but it will be more easily financed in East Germany than elsewhere and, amongst other countries, more easily in the least heavily indebted ones. In the West, Germany will benefit most from the opening up of Eastern markets, since it already has the most developed economic relations with the East. The second major conclusion is about timing: Eastern Europe is currently suffering from a drastic reduction in living standards, as expected though not always predicted to be of such a magnitude; but it also experiences the rather unexpected unwillingness of Western private investors to immediately put money into Eastern economies, together with the relatively slow implementation of Western public aid. The risks of major turmoil are paramount if signs of improvement are not quickly forthcoming: such signals are a condition for some governments to retain their credibility. The danger of a social crisis is all the more important in the current phase when new individual and collective behaviours are emerging.

This paper discusses some of the issues raised by the institutional reforms (including the privatisation of State-owned enterprises) envisaged in Eastern Europe. We first briefly refer to the historical context in which these reforms are taking place, and mention the limits of the previous trend of microeconomic reforms implemented in the 1980's in countries like Poland or Hungary. We then present a quick (and incomplete) overview of the theoretical debate on privatisation among Western economists, before pointing out several contraints that might affect both the nature and the timing of the privatisation process in Eastern Europe. The main contribution of this paper consists however in suggesting and discussing different alternatives for transferring property rights and/or control rights away from central planners to decentralized decision-makers.

This paper analyzes some of the consequences of the pending economic and monetary union of the two Germanys. Particular emphasis is given to the real implications for the supply side of the East Germany and for resource flows between the two economic regions.

Reforming monetary and financial institutions and mechanisms and establishing currency convertibility are two major elements in the transition process currently under way in Eastern European economies and in their opening up to world markets for goods and capital. Indeed until recently these economies have operated under internal monetary regimes in which money only served as a passive counterpart of centrally planned decisions concerning real flows, while external payments were organized according to bilateralism, due to currency inconvertibility. These monetary mechanisms have created major internal imbalances and stand in the way of any expansion of foreign external relations. A brief review of the essential roles of a well-functioning monetary and financial system suggests that the reform of monetary mechanisms cannot succeed without profound institutional changes in other sectors of the economy. The failure of previous attempts at partial reform made in several Eastern European countries in the past two decades confirm this diagnosis. Among the lessons that can be learned from such failures, it clearly appears that enforcing a « hard budget contraint » on major economic units — enterprises and the state — is crucial for the success of any transition to market mechanisms. However, creating of complete set of financial markets is not necessarily required. As to external payments, the immediate establishment of convertibility is not always desirable and might even prove infeasible in some cases. The specific structure of external trade and payments that has been inherited from the Council for Mutual Economic Assistance (CMEA or COMECOM) and the major imbalances that are likely to result from the transition process seem to favor the creation of a regional payments system. The need to use a convertible currency in the multilateral compensation scheme to be put in place under such a regional system points to the possibility of using the European Ecu as a base for credit facilities in an Eastern European Payments Union.

The investment needed to rebuild several of the economies of Eastern Europe will most probably be fairly important. This paper tries to answer the question of the adequacy of Western saving in the light of this new development. We argue that the world will suffer from a rise in the real rate of interest during a transitory period when an amount of capital will be reallocated to those parts of the East desiring and seen to be credit-worthy of possession of such capital. We then study the causes and consequences of the elevation of the real rate of interest, through the theoretical perspective of models of economic growth. Because Europe and the rest of the world will not be presumably equally affected, we reason in the framework of a two-countries, two- sectors model. We finally deal with the question of what the rest of the world should do, if anything, in response to the shocks coming from Eastern Europe.

It has recently been argued that the post-war Marshall Plan experience could be repeated for the Eastern countries now. Against this, recent historical studies have shown that the Marshall Plan was less effective than it has been claimed and should not therefore be used as a justification for economic aid to the East today. We compare the situation of Western Europe at the time with the current one in Eastern Europe from the point of view of the physical states of the economies, the attitudes to economic policy, the problems of internal stability and of external trade and payments. In particular, we look at the process of transition to control-free economies with externally convertible currencies. We come to two principal conclusions. Firstly, while the productive sector of Western European economies was probably already on the way to recovery, this is not true in the East today. The case for aid for reconstruction is therefore stronger than it was then. Secondly, the political will, coupled with a natural economic tendency to reach regional economic integration, allowed Western at the time to achieve a gradual transition to multilateral payments convertibility through the succesful creation of a payments union. However, the conditions for such a choice do not seem to be present Eastern Europe today. However, the alternative route of a direct passage to convertibility is likely to produce an unstable situation there is a substantial external injection of liquidity.

A year ago, a large consensus emerged between the industrialized countries about the necessity of supporting economically the current political changes in Eastern Europe. Within a few months, the financial mobilization in favour of the former satellites of the USSR and, more recently for the USSR itself, has reached a great magnitude. Net transfers of resources for these countries could reach a higher level in absolute terms and constant prices than Marshall aid to Western Europe. Beyond these financial aspects, the quality of the offered economic cooperation gives evidence of the industrialized countries willingness in assuring that the uneasy transformation of Eastern Europe countries into market economies will succeed. Whatever the justification of this mobilization is, it makes a sharp contrast with the inertia of the North-South systems of cooperation and the limited ambition of the decisions already taken to release financial restrictions in the developing regions most hit by the crisis, especially Sub-Saharan Africa and Latin America. In such conditions, crowding-out risks for developing countries should not be underestimated, even if higher economic growth could be expected in the OECD countries, particularly in the EEC, due to German unification and rising demand from Eastern Europe. Those risks arise from expected tensions on international financial markets, from political trade-offs that may occur within the budgetary aid of industrialized countries, and from the more intense competition that the developing countries will have to face on world markets and in attracting foreign investments.