ECONOMICS OF

TRANSITION IN CENTRAL
AND SOUTHEAST
EUROPE
Carolyn Kadas
Lesson 1
Introduction of Course
Macroeconomic concepts
Central, East, and Southeast
Europe
What is a transitional economy?
• Term used to characterize former socialist economies
engaged in the process of establishing market institutions,
or
• any economy, which attempts to replace bureaucratic
mechanisms with greater reliance on markets
• Transitional economies are characterized by rapid change in
institutional arrangements.

• Members of the society face rapid change in relative prices

and structures of production and high uncertainty

• What are the short-run and long-run consequences of

institutional change for economic growth and well being?
We will study:
• Process of economic reform, focusing on
macroeconomic stabilization, market
liberalization, privatization, enterprise
governance, the role of the state, and
establishment of institutional infrastructure,
including the creation of a separate, tax-based
state, which is capable of providing rule of law
• Economic and social effects of huge economic
and political changes during the 1990s and 2000s
Geographies
• Module 1 - focus on the transition experience in the
Central European countries or the New Member States
(NMS) – Poland, Czech Republic, Hungary, Slovenia,
Slovakia, and the Baltics (Latvia, Lithuania and Estonia)
• Module 2 - South East European (SEE) countries, i.e.
former Yugoslavia and its successor states, including
Croatia, Bosnia Herzegovina, Serbia, Montenegro,
Macedonia, and Kosovo, plus Romania, Bulgaria and
Albania
• For comparative purposes, we will also look at the
transition in Russia, Ukraine and the former Soviet
Republics.
Course requirements:
• Attendance (70% of class meetings obligatory)

• Midterm essay exam (33% of grade)

• In-class 2-hour exam: you choose 3 out of 5 essay questions to
answer. October 19, 2022, 9-11
• Research paper and oral presentation (33%of grade)
• 3000 words plus bibliography on a topic of your choice taken from
themes we cover in the course, plus a 10-minute (max) power point
presentation to class. Due second half of November
• Presentations the last 2 class meetings (end of November)

• Final oral exam (33% of grade) (early January 2023)

• On all material covered in class
Syllabus (1)
Module 1
1. Introduction of course, definition of macroeconomic terms

2. Reasons for the collapse of Communism in CEE

3. Attempts at economic reform prior to the collapse in 1989-90

4. Beginning of transition from command to market economy.

The Washington Consensus

5. Privatization – various modes used in various countries,

outcomes of privatization in NMS
Syllabus (2)
6. State-building and social effects of transition – the Baltics
vs. the Visegrad countries

7. EU accession and euro-zone entry. Maastricht criteria

and new member states

8. Enterprise development in Central Europe; foreign direct

investment

9. Impact of 2008-9 global financial crisis on CEE, Covid in

CEE, effects of Russian invasion of Ukraine on CEE

10. Midterm exam

Syllabus (3)
Module 2

11. Economic situation in Romania, Bulgaria and Albania

prior to transition

12. Yugoslavia prior to transition

13. The 1990s – economic effects of the break-up of

Yugoslavia, beginning of reforms in Albania, Romania and
Bulgaria

14. Privatization, role of FDI in SEE

Syllabus (4)
15. Social effects of transition in SEE - labor market dynamics,
unemployment, employment, migration

16. EU integration and regional economic integration - Romania

and Bulgaria, Western Balkans

17. China and Russia in the western Balkans

18. Course review

19. Student presentations

20. Student presentations

Readings (CEE)
• Myant, Martin and Jan Drahokoupil, Transition
Economies: Political Economy in Russia, Eastern Europe,
and Central Asia.   Blackwell-Wiley, 2010
• Aslund, Anders,   How Capitalism Was Built: The
Transformation of Central and Eastern Europe, Russia
and Central Asia . Cambridge University Press, 2007
• Bohle, Dorothee and Bela Greskovits, Varieties of
Capitalism on Europe’s Periphery, 2012
Readings (SEE)
• - R.J. Crampton. The Balkans Since the Second World
War (Pearson, 2002)
• - Will Bartlett. Europe's Troubled Region: Economic
Development, Institutional Reform and Social Welfare in
the Western Balkans (Routledge, 2008).
• - Milica Uvalic. Serbia’s Transition: Towards a Better
Future (Palgrave, 2010)
• - Sabrina P. Ramet. Balkan Babel. The Disintegration of
Yugoslavia from the Death of Tito to the Fall of Milosevic,
4th edition (Westview Press, 2002)

• Note: all these books are in the library

Macroeconomic indicators
• We will use these indicators throughout the course to
compare and contrast CEE and SEE countries with each
other and other parts of the world.
Gross domestic product (GDP)
• Gross Domestic Product (GDP) is the total flow
of goods and services produced by an economy
over a given time, normally a year. You get it by
valuing outputs of goods and services at
MARKET prices, and then adding everything
together.
• Excluded are all intermediate (or unfinished)
goods;
• Included are only goods used for final
consumption or investment goods (e.g. capital)
• For emerging markets – GDP is an inexact
measure.....due to informal/black/grey markets
GDP per capita 2021
GDP per capita in Europe, 2021
GDP per capita growth, 1998-2017
Black/grey market as % of GDP
Inflation
• percentage rate of change in price levels, based
on an average of all the prices in an economy.
• The consumer price index (CPI) is the most
common indicator used to follow inflationary
trends. It is based on a basket of different goods
and services used by a typical household – the
basket is determined by governments.
 Demand-pull inflation
• what happened in Communist economies – “too
much money chasing too few goods”. Prices go up
when demand exceeds availability. Demand (or
purchasing power) can be pushed up by a number
of factors:
• a credit boom (credit is easy to get, so there’s more
borrowing to buy houses, cars, etc.)
• tax cuts
• increased government spending,
• wages rising faster than productivity (possibly due
to labor shortages, or loose monetary policy)
• not enough goods or poor quality goods available
(Communist economies)
 Cost-push inflation
• caused by price shocks. Sudden jumps in commodity and
raw material prices (like oil prices) which makes everything
that has to be transported using gasoline more expensive –
the knock-on effect.

• Or can be caused by a weak domestic currency which

makes imports more expensive (this happened in Europe
after the euro was introduced – when first introduced the
euro’s value was low compared to the dollar, so imports
from the US were relatively more expensive than they had
been vis-à-vis the Italian lira, the German mark, etc.).
Inflation in Europe, August, 2022
Inflation euro area 2012-2022
Energy prices (2021-22)
(Feb. 1, 2022 = 100)
Hyperinflation
• Prices rising over 50% per month – a result of high
money-supply growth (government printing lots of money)
due to its inability to borrow to cover a large budget deficit

• Example: Serbia in 1993 – in the midst of the Yugoslav

wars, the Serbian government ran out of money, was
unable to borrow from other governments, so it started
printing money
• Inflation reached 313 million % per month
Effects of hyperinflation –
Germany in the 1920s
EU unemployment 2022, in %
Balance of payments
• balance of payments is an account of financial
transactions between one country and the
international economy. The accounts are split into
two sections:
• current account, which measures trade in goods
and services,
• capital account, which measures capital flows
Capital account
• includes portfolio capital flows (share transactions
and the buying and selling of government debt)
and direct capital flows (Foreign direct investment
- FDI)
• is more important for developed countries with
developed stock markets.
Current account
• made up of visible trade (i.e. merchandise
exports and imports) and invisible trade (i.e.
income and expenditure for services such as
banking, insurance, tourism and shipping, along
with profits earned overseas and interest
payments).
• Current account is a more important
measurement for emerging markets - it is a
measurement of net trade in goods and services.
 Balance of payments
• indicates in a given year whether a country is a debtor or a
creditor vis-à-vis foreign countries.
• a large balance of payments deficit is generally considered a
problem, especially if the deficit persists year after year;
• a surplus is positive, reflecting an economy’s strength, which
makes it possible for a country to “earn” more than it
“spends” abroad.
Budget deficit
• A government has a budget deficit when it
spends more in providing services, paying its
employees, etc. (expenditures) than it collects in
taxes (revenue).
• A deficit is reconciled by borrowing or, if the
government can’t borrow, by printing more money
• What happens if a country has deficits on both
the budget and the current account at the same
time? Governments are forced to implement
austerity measures: cutting imports, cutting fiscal
spending, raising interest rates to reduce local
demand, etc.
Interest rate
• The price paid by borrowers for using money
• The higher the interest rate, the more attractive it
is to lend, and the less desirable it is to borrow.

• Ability of consumers, businesses and

governments to borrow at reasonable interest
rates is an indicator of a functioning economy..
Exports
• Exports are a key economic indicator, particularly
in emerging markets. The structure of exports
gives an idea of the overall health of an economy;
• If an economy depends heavily on exports of raw
materials or commodities, like oil and gas, it is
more likely to be affected by swings in world
prices – these swings can cause drastic
economic slowdowns- recessions or even
economic crises
Imports
• Emerging markets import:
• Consumer goods – initially, to satisfy consumer demand
• Capital goods – to build infrastructure, modernize
Monetary policy
• process by which the government, central bank,
or monetary authority of a country controls the supply of
money, availability of money, and cost of money or
interest rate to attain a set of objectives oriented towards
the growth and stability of the economy.
• - example: US’s and EU’s more recent «quantitative
easing» - purchasing government bonds in order to
increase the money supply, to counteract recession
following global financial crisis, and now, to counteract
recessionary effects of Covid
Fiscal policy
• use of taxation and government spending to influence the
economy
• Design of tax system
• Coverage and effectiveness of transfer payments
(infrastructure, education, pensions, healthcare,
unemployment, disability, etc.)