Pressure to Adjust: Consequences for the OECD Countries from Reforms in Eastern Europe

The opening of formerly planned economies to the world has not only profound consequences for these Central and Eastern European economies. There are also substantial effects on the economies of Western Europe, resulting from enhanced price competition in product markets, migration and capital flows. The macroeconomic effects and adjustment requirements in the OECD countries are fundamentally determined by the two central but not mutually exclusive growth options for the reform countries, which are analysed in the paper: The option of an import-led growth in Eastern Europe, resulting from capital transfers from the West in order to assist the modernisation and investment process in the East, and the option of an export-led growth, allowing for the unrestricted entering of Western markets and imitating the experience of Asian economies. The estimated magnitudes and likely economic effects speak in favour of the export-led growth option, but under both options the governments in the West are challenged.