This was the most technocratic direction of thinking, which tried to avoid challenging the main ideological assumptions of a communist model (see Section 2). The idea was to ensure that central planning decisions guarantee optimal allocation of resources and macroeconomic equilibrium. Various mathematical models, with an increasing engagement of computers (as their construction and processing power rapidly progressed), were to serve this purpose (see Kovacs et al., 2022). The leading role was played by the Soviet economic-mathematical school with internationally recognized names such as Leonid Kantorovich (laureate­ of the Nobel Prize in Economics in 1975), Viktor Novozhilov, and Vasilii Nemchinov (Belykh, 2016). They built models related to various sectors of a national economy and various aspects of economic policy. Similar research was developed in other countries of the Soviet bloc. Some inspiration also came from Western scholars, such as another Nobel Prize laureate (in 1969), Jan Tinbergen, who built a macroeconomic model of the Dutch economy (then applied to other Western economies).

The mathematical models built in centrally planned economies aimed at overcoming existing information and data processing barriers. Optimists like the Polish economist Oskar Lange (1967) believed that computers and mathema­tical programming could have an advantage over a market mechanism in the optimal allocation of factors of production. However, it never happened due to distorted micro-level information resulting from perverse incentives at the enterprise level (see Section 2).

Three decades earlier, Lange (1936, 1937), in his polemics with Mises (known as the Socialist Calculus Debate), presented the idea of transmitting central decisions on production, input allocation, and investment to autonomous enterprises in the form of shadow prices instead of physical targets and limits.⁴ It was a combination of rationalization of central planning and market socialism (see Section 3.3). According to Lange (1967), employing computers and mathe­matical programming could make setting shadow prices faster than the original trial-and-error method.

Overall, the intellectual efforts to improve central planning, including the use of the then available computer techniques, could potentially help make better economic decisions at the central level. In practice, it rarely happened due to political constraints. However, it could not overcome information barriers in the multi-level process of plan bargaining and perverse incentives at the micro level created by the very nature of the central planning system.

This was the least concrete and instrumentalized stream of reform thinking present in several works of non-Marxist scholars and non-orthodox Marxists (see, e.g., Brus, 1975). It was not always understood as building a Western-type liberal democracy. Rather, it was a belief that participation of various stakeholders, such as workers, consumers, local communities, or ordinary citizens, in central planning decisions would make them economically and socially more rational.

Unfortunately, as in the case of technical rationalization of central planning (Section 3.1), a broader participatory process in designing a central plan could not overcome information barriers created by a multi-level bargaining process and perverse microeconomic incentives associated with this economic system (see Section 2).

It could make sense if it were combined with a deeper decentralization of the economic system, which exposed autonomous enterprises to market signals, and the limited role of the central plan (concentration on the most strategic decisions taken at the government level), that is, a market socialism model (see Section 3.3).

For example, the Yugoslav decentralized model based on labor self-management,⁵ enterprise autonomy, and its exposure to market signals (see Sections 3.3, 4, and 5) tried to develop various participatory mechanisms, especially after the 1972 constitutional changes, sometimes called “social planning” (Estrin, 1983; Uvalic, 2024). However, these mechanisms were far from Western-type democratic institutions. They could not challenge the political monopoly of the League of Communists of Yugoslavia (LCY), even if the latter’s grip on power and control of society was relatively smaller compared to “sister” parties in countries of the Soviet bloc.

The Action Program of the Czechoslovak Communist Party (CSCP), adopted on April 5, 1968,⁶ envisaged both political liberalization and economic decentra­lization measures (of the market socialism type). The former included, among others, freedom of speech and abolition of censorship, freedom of assembly, freedom to travel abroad, and rehabilitation of victims of Stalinist persecution. However, even such a limited program of political reforms (without a promise of a multi-party system and free elections) resulted in the Soviet-led intervention of the Warsaw Pact in August 1968 and the end of the Prague Spring.

The same happened in 1956 with the attempt at political regime change in Hungary and with the Solidarity movement in Poland in 1980–1981 (although Solidarity was defeated by the Polish authorities themselves, without Soviet intervention). This highlighted the fundamental conflict between any form of genuine democratization/political liberalization and the hegemonic role of the communist party and the geopolitical interests of the Soviet Union (the so-called Brezhnev doctrine).⁷

Overall, democratization or a broader participatory process in designing a central plan (even if politically possible, which was not the case) could not overcome information barriers and perverse microeconomic incentives created by the centralization of economic decisions and elimination of a profit-maximizing objective function at the enterprise level. It is also difficult to find any historical example of a sustainable liberal democratic regime with a non-market and non-private economy (Dabrowski, 2021).

Decentralization of a communist economy by giving enterprises more auto­nomy and exposing them, at least partly, to market forces was another direction of reform thinking. Its intellectual inspiration came from various streams of socialist/leftist traditions, practical experience of cooperative movements,⁸ and other types of collective enterprises,⁹ not necessarily in communist countries (for example, the Israeli kibbutz movement10).

The idea was to give the SOE or other form of collective/non-private enterprise a broad operational and, in some models, also investment autonomy (see Kornai, 1992). Unlike in the Lange (1936) model, enterprises had to deal with actual market prices (not shadow ones) and domestic and external competition. Such a reform required a significant change in the role, content, and instruments of the central plan. Instead of setting direct production and investment targets and allocating inputs to each sector/industry/enterprise, the central plan was to formulate government economic policy and its instruments and play a forecasting/projection role (so-called indicative planning).

One of the consequences was a radical change in the role played by the communist party apparatus, government bureaucracy, and intermediate levels of the management hierarchy, such as trusts, concerns, associations, etc. They resisted decentralization reforms, quite often successfully.

This type of reform also posed an ideological challenge because of the reintroduction of a market mechanism and the abandonment of the dominant allocative role of the central plan. Its authors used to be blamed for rebuilding capitalism. For example, this happened in Czechoslovakia after the Warsaw Pact intervention in 1968. To avoid such an accusation, ideological gymnastics were necessary. For example, Edvard Kardelj, the chief ideologist of the LCY and one of the archi­tects of the labor self-management reform, wrote extensively about “social ownership” and “social planning” (see, e.g., Kardelj, 1976) as having their roots in Marxist tradition. Similarly, Ota Sik, author of the Czechoslovak reform in 1968, presented ex post ideas of a “market economy without capitalism” and a “third way” between Soviet-type real socialism and capitalism (see Sik, 1971; 1991). Even greater ideological “gymnastics” had to be exercised by the Chinese and Vietnamese communist parties when they started market-oriented economic reforms, which assumed a dominant role for the private sector. Not surprisingly, the decollectivization of Chinese agriculture was called the “household responsibility system,” while newly created firms in industry and services initially operated under the name of “township and village enterprises” (TVEs). They were founded and controlled by local authorities (Cheng, 1996).

Unlike in China and Vietnam, in countries of the Soviet bloc and Yugoslavia, the dominant role of state/collective/non-private firms was the “red” line, which reformers could not cross without the risk of being ideologically excommunicated and politically marginalized or even repressed.11 Hence, a big interest in developing various variants of a market socialism model, which was seen as potentially feasible both politically (however, not always and not in each country) and technically (unlike rationalization and democratization of central planning — see Sections 3.1 and 3.2).

Yugoslavia, after its geopolitical split with the Soviet Union in 1948, was the first country to introduce economic decentralization based on labor self-management. The Yugoslav economic system survived until the breakup of Yugoslavia in 1991, but was modified several times, partly under political pressure from the LCY, which did not want to lose political control over the economy and society. The most market-oriented variant of this system functioned relatively briefly, between 1965 and 1972 (Uvalic, 2024).

In April 1968, the already mentioned Action Program of the CSCP12 declared Yugoslav-type economic reforms, including the institution of labor self-management at the enterprise level (see also Dyba and Kouba, 1989). However, because of the Warsaw Pact intervention in August 1968, the reform was abandoned in 1969–1970.

Hungary also implemented a decentralized economic model in 1968 under the name of the New Economic Mechanism (NEM) (see, e.g., Balassa, 1985; Kornai, 1992). It passed operational decisions directly to enterprise directors instead of labor self-management bodies. Despite an unfavorable geopolitical environment (after the defeat of the Prague Spring) and some reversals in the 1970s, the NEM survived until 1989 when a post-communist transition started (Boote and Somogyi, 1991). In the 1980s, especially in the second half of the decade, the reform effort was reinvigorated. Among other things, there was greater openness toward the private sector and joint ventures with foreign firms, and financial sector reforms, which created a good starting point for genuine market reforms in the 1990s.

The Solidarity movement in Poland in 1980–1981 created a political window of opportunity for political and economic reforms. Among several presented ­reform blueprints, the most radical one of Balcerowicz et al. (1981) recommended a radical market socialism model with labor self-management, partly drawing from Yugoslav and Hungarian experiences. Part of the Solidarity movement (the bottom-up Network of Organizations of the Solidarity Trade Union of Leading Enterprises) proposed the adoption of the law on social enterprise, in which the main strategic decisions, including nomination of enterprise directors, would belong to workers’ councils. In the economic sphere, it supported the Balcerowicz et al. (1981) proposal, unlike the mainstream of the Solidarity Trade Union, which concentrated on social demands and was rather reluctant to market reforms. The ruling Polish United Workers’ Party (PUWP) opted for less radical solutions and continued direct government control over various spheres of economic life.

The laws on the State Enterprise and Employees’ Self-Management in State Enterprises, adopted in September 1981, were the political compromise between the Solidarity blueprint of social enterprise and a more conservative original PUWP position. For example, only the workers’ council in smaller and medium-sized enterprises obtained the right to nominate directors (Jarosz and Kozak, 1992). After the introduction of Martial Law in December 1981 and the delegalization of the Solidarity Trade Union, prerogatives of the workers’ councils (and enterprise directors) were further curbed, although labor self-management institutions survived until the early 1990s (in the 1980s they were backed by the underground Solidarity Trade Union). Other components of economic reform were introduced only fragmentarily and lacked systemic coherence, so the actual economic regime in Poland in the 1980s was far behind the Yugoslav or Hungarian ones. Polish enterprises were still more dependent on the government’s allocation decisions than on market signals (Balcerowicz, 1995). Consumer prices, and a substantial part of producer prices, continued to be set by the government, which caused widespread physical shortages and the necessity of administrative rationing of basic consumer goods.

Similarly, the perestroika reform started in the second half of the 1980s in the Soviet Union, despite granting state enterprises some operational autonomy, failed to expose them to market forces and hard budget constraints, using Kornai’s (1980) terminology (Dabrowski, 2023). The Law on State Enterprises of 1987 intro­duced the institution of councils of employee collectives, drawing, among others, from Yugoslav and Polish experiences. However, their competencies were limited.

How to ensure genuine enterprise autonomy in taking microeconomic decisions, against government and communist party interference, was the most serious practical question, never fully resolved. Interestingly, this was not the top issue in the theoretical literature on labor self-management, where the assumption of its full decision-making autonomy was frequently taken (naively) for granted (see, e.g., Ward, 1958; Vanek, 1970).

As the experience of contemporary governance systems demonstrates, the government (in a broad sense, including its legislative and judicial branches) can seriously restrict economic freedom even in liberal democratic systems with a dominant role for private enterprises and market mechanisms. In those communist countries which tried to decentralize their economic systems, there were three additional obstacles: (i) the institutional legacy of a traditional system of central planning with the oversized government apparatus built according to sectoral/industrial lines and intermediate levels of management, such as branch or territorial trusts, concerns, associations, etc., used to set physical production and investment targets for enterprises, and physical limits of inputs; (ii) the political monopoly of the communist party, which used to interfere in various details of socioeconomic life, in particular, personal nominations (the so-called communist party nomenclature); (iii) the dominance of non-private ownership of business assets, in most cases, formally state-owned.

Even if the first obstacle could be removed, as it happened largely in Yugoslavia (due to a short period of the centralized system, and the federal character of the Yugoslav state) and partly in Hungary, two others remained.13 And the third obstacle was also non-trivial, from legal, political, and ideological points of view (see Section 3.3).

In this context, one must see the importance of labor self-management, not only as an ideological concept and, sometimes (as in Poland in the early 1980s), a political movement, but as the only governance mechanism which could protect enterprise autonomy (whether state-owned as in most communist countries, or socially owned, as in Yugoslavia14). Despite some popular clichés, which saw labor self-management as a symptom of anarchic democracy, which did not allow enterprise managers to take swift and effective decisions, it was the institutional solution which insulated them from excessive political and administrative interference of a communist party apparatus and government administration, including the intermediate levels of management (if they still existed) (Dabrowski, 1985).

This was the reason why the Hungarian Socialist Workers’ Party (HSWP), which was originally reluctant to this institutional solution (due to memory of the political role played by the spontaneously created workers’ councils during the 1956 revolution), decided to establish employees’ councils in the second half of the 1980s (Adam, 1987).

However, the institution of labor self-management, even if the workers’ councils had the right to appoint and fire the enterprise director, was not a perfect mechanism to protect enterprise autonomy. This was due to limited employees’ interest and, therefore, activity in labor-management institutions. Even in Poland in the early 1980s, where the labor self-management movement was politically backed by the Solidarity Trade Union,15 the share of active workers’ councils did not exceed 10–15% (Jarosz and Kozak, 1992). In such circumstances, workers’ councils could be manipulated not only by enterprise directors but also by the government administrat­ion and the communist party. And, indeed, this was the frequent situation in Yugoslavia in the 1970s and 1980s (Mencinger, 2000; Uvalic, 2024).

Unlike the previous question, this was the most frequently analyzed problem in the economic literature on labor self-management. Examples include works by Ward (1958), Vanek (1970), and Horvat (1975). According to these authors, a self-managed enterprise tends to maximize income (profit plus wages) per employee. Such a goal function leads to more rational microeconomic behavior than in the centralized system of central planning, in which SOEs fight to minimize production targets set by the supervisory institutions and maximize input allocation (see Section 2). However, it differs from a private enterprise in a market economy, which maximizes profit.

The difference between income per employee and the profit goal function has consequences for the size of optimal output (lower than in a private firm with similar factor endowments) and the choice of production techniques (a preference for capital-intensive and labor-saving methods in a self-managed enterprise).

However, the actual goal functions in Yugoslav enterprises differed from the theoretical behavior of the Illyrian firm as analyzed by Ward (1958), due to the actual economic and political environment, which differed from the model assumptions (Horvat, 1972). The Yugoslav economy, despite being the most reformed in comparison with other communist countries, was never fully market-based due to political and administrative interference by the LCY and the government, although predominantly at the republic and local levels (Lydall, 1984; Mencinger, 2000). The actual multi-goal function combined the economic, professional, and political interests of employees, management, workers’ council functionaries, local government, and the LCY (Schrenk, 1981).

Another problem discussed in the economic literature, particularly by the pro­perty rights school, concerned the supposed preferences of employees’ collectives for wages and salaries (personal income) at the cost of undistributed income for investment purposes. According to Furubotn and Pejovich (1972) and Pejovich (1975), limited ownership rights in a self-managed enterprise (only the collective right of use of enterprise capital) made employees uninterested in investing in enterprise development. They could benefit from such investment only as long as they remained employed in their enterprise. Therefore, they would prefer higher personal income and use it for individual investment (outside the enterprise).

The same problem existed in a decentralized enterprise without the labor-management institution, where all decisions were concentrated in the manager’s hands (the original Hungarian model).

The theoretical predictions of the property rights school contradicted, to some extent, findings of the neoclassical analysis presented in Section 4.2, according to which a self-managed enterprise would prefer capital-intensive production techniques (such techniques require investment). Arguments of the property rights school also did not take into account ideological constraints in communist economies (even in Yugoslavia), where opportunities to invest privately in business assets remained limited.

Furthermore, the property rights school’s predictions did not find empirical confirmation in Yugoslav self-managed firms, which, similarly to SOEs in other communist economies, overinvested rather than underinvested (Uvalic, 2024). However, the actual market environment of these firms differed from theoretical assumptions (a free market), due to various forms of administrative and political interference in their activity.

While the market for goods and services in an economy dominated by non-private autonomous enterprises could function similarly to that in an economy dominated by private firms, the situation was different in the case of labor and capital markets.

Given the quasi-owner status of the employees’ collective in a labor-managed enterprise and the goal function of the latter (maximizing income per employee; see Section 4.2), such a firm would be reluctant to hire new employees or fire incumbents. Wages would differ between enterprises. In such an environment, a single labor market could not exist, and wages would not be driven by the demand for and supply of labor at the macro level (or even within a region or municipality). They would not serve as an external parameter of economic decisions.¹⁶

The capital market, in its broad meaning (a market for savings), could exist­ only partially. Enterprises and individuals could deposit their savings in banks, which would lend them to enterprises that needed more working capital or financing for investment. Hypothetically, enterprises could also issue debt instruments (bonds). On the other hand, the equity market could not exist in an economy based on state/collective ownership, which had systemic restrictions on private entrepreneurship. If such restrictions were removed, the private sector would gradually crowd out non-private firms even without an active privatization policy.

However, practice was even worse than the limited hypothetical room for the capital market described above. None of the countries that experimented with market socialism had a commercial banking system that could offer effective financial intermediation. In Yugoslavia, although a two-tier banking system was established in the mid-1960s, after 1971, commercial banks were transformed into a sort of nonprofit organizations serving the needs of enterprises, which controlled them via self-management agreements (Uvalic, 2024). In other countries, two-tier banking systems started to be formed at the very end of the communist system: from 1987 in Hungary, and from 1988 in Poland and the Soviet Union. No country had legislation allowing the issuance and market trading of corporate debt instruments.

In all communist countries, including Yugoslavia, governments retained an important role in investment policy and reallocation of savings between sectors­, industries, and enterprises, despite attempts at market-oriented reforms (Sirc, 1983; Tardos, 1987; Balcerowicz, 1990). In the 1970s and 1980s, Yugoslavia had a system of horizontal self-management agreements and social compacts, in theory negotiated and signed voluntarily by the basic organizations of associated labor (BOAL),17 but de facto controlled by the LCY organizational structures and government agencies at the federal, republic, and municipal levels. One of their functions was to substitute for the missing mechanisms of the capital market and, in part, the labor market.

The capacity of the decentralized communist economy to innovate was ­another topic of debate. The consequences of the goal function of a labor-managed firm (maximizing income per employee; see Section 4.2) might suggest that such a firm would be interested in innovations serving this purpose. Also, a participatory system of management in a labor-managed firm could help in accepting innovations and the risks associated with them. On the other hand, similarly to investment decisions, the lack of individual exclusive property rights in a labor-managed enterprise did not allow for full market pricing of innovation effects (positive or negative), in terms of personal income and wealth of those who take the respective decisions and risks (Pejovich, 1983).

At the macro level, administrative limits on the creation of new private firms, the absence of a stock market, and the absence of sophisticated capital market institutions such as venture capital funds (see Section 4.4) reduced the chances for breakthrough innovations (Balcerowicz, 1990).

Far-reaching government interference in enterprises’ production and investment decisions in all countries that experimented with market socialism further deteriorated chances for truly innovative behavior (Sirc, 1983; Balcerowicz, 1990). As a result, a decentralized economic system based on employee self-management, although it was more flexible and innovative than a typical centrally planned economy (Pejovich, 1984), lagged behind the market system based predominantly on private enterprises. In the case of Hungary and Poland in the 1980s, the dif­ferences from the innovative behavior of SOEs in an unreformed centrally planned economy were negligible (Balcerowicz, 1990).

Analysis in Sections 3.3 and 4 shows that the concept of a decentralized non-private economy was never fully implemented, even in Yugoslavia, which was the closest to this model, especially between 1965 and 1972. Everywhere, the ruling communist parties and government apparatus retained extensive power to interfere in business decisions at the enterprise level, especially with respect to investment. A market mechanism was never adopted fully.

In Hungary, the government continued to set many prices and regulate profit margins for others. The Hungarian forint remained inconvertible. Enterprises had only partial access to foreign markets, mainly in the form of retention quotas of export proceeds in foreign currency (Boote and Somogyi, 1991).

In Yugoslavia, most prices were, in principle, free. However, authorities tried to influence them by various instruments, for example, price freezes or social compacts (see Section 4.4), especially in times of inflationary pressures (see below). The convertibility of the Yugoslav dinar, the declared goal of the 1965 economic reform, was never achieved. Multiple exchange rates prevailed between 1950 and 1989 (Stojanovic, 2007).

In Poland, in the 1980s, the implementation of enterprise autonomy and market mechanisms was much less advanced and more chaotic than in Yugoslavia and Hungary. Key prices were controlled by the government, which led to widespread shortages. The Polish zloty remained inconvertible, and enterprises had even more restricted access to foreign markets than in Hungary.

The incomplete and inconsistent implementation of market-oriented reforms led to a situation of systemic vacuum when central plan discipline stopped working, but market discipline did not work sufficiently or did not work at all. The very rare market exit of ineffective enterprises was the best illustration of continuous soft budget constraints, in Kornai’s terminology (Kornai, 1980). Nevertheless, enterprises could learn to operate in a market environment, even a distorted one, which helped some of them during the post-communist transition (in comparison with enterprises in the unreformed system of central planning).

At the macro level, soft monetary and fiscal policies further contributed to weakening enterprises’ budget constraints and building up domestic and external imbalances (see Section 5.2). Accommodative macroeconomic policies partly stemmed from the ideological legacy of central planning (financial flows should follow investment and production targets) and political constraints. Communist regimes preferred to increase subsidies rather than risk social and political unrest, which might be provoked by unpopular economic decisions such as price adjustments or closing ineffective enterprises. For example, attempts at administrative price increases in the Soviet Union in 1962, and Poland in 1970, 1976, and 1980 led to strikes and violent events in major industrial centers. In the 1970s and 1980s, communist parties tried to strengthen their political positions by offering societies new social entitlements, which caused additional macroeconomic imbalances.

In the case of Yugoslavia, the softness of monetary and fiscal policies also resulted from the relative weakness of the federal center against republican authorities. Since 1961, the country was a permanent client of the International Monetary Fund (IMF).

The comparison of the economic performance of reformed countries (those which experimented with the idea of market socialism) with the unreformed ones (those which continued the dominant role of central planning) is not easy due to the lack of fully comparable cross-country historical data, unreliability of statistics in communist economies, and several factors other than the characteristics of the economic model that determined economic results. Therefore, our analysis is selective and approximate.

Table 1 suggests that economic growth rates in the 1970s and 1980s in two reformed countries were no worse (Hungary) and even slightly better (Yugoslavia) than in others. However, a decentralized model did not protect them from stagnation or even recession in the 1980s, which was a common phenomenon in the whole region.

The two reformers (Yugoslavia and Hungary) and the only fragmentarily reformed Polish economy recorded higher inflation than their unreformed peers (Table 2). Yugoslavia ended up with hyperinflation in 1989, and Poland with near-hyperinflation in the second half of that year. However, the higher inflation in the reformed countries stemmed mainly from more flexible price regimes (see Section 5.1). In other countries, in particular, Bulgaria, Romania, and the Soviet Union, inflationary pressures manifested themselves in the increasing physical shortages of goods and services, that is, repressed inflation (Poland had both open and repressed inflation).

Hence, despite higher inflation, economic agents in the reformed countries enjoyed a better quality of consumer and producer markets, without visible shortages of basic consumer goods and services, and producer supplies. There was also broader access to imported goods, especially in Yugoslavia. Besides, the population of Yugoslavia and Hungary had more freedom to travel outside the communist bloc than in other countries.

Unlike other communist economies, Yugoslavia dealt with the unemployment problem. The unemployment rate increased systematically, from 3–4% in the mid-1950s to above 16% in 1990 (Astrov and Jovanović, 2024), despite large-scale labor migration to Western Europe. It differed markedly across republics and regions, depending on their level of economic development. In 1988, it amounted to only 2.5% in Slovenia, the most developed republic, and 36.6% in Kosovo, the least developed region (Bartlett, 1991, Table 4).

Some authors (e.g., Lydall, 1984) saw it as the effect of maximizing income per capita by a self-managed enterprise (see Section 4.2). However, unemployment has been present in most market economies, not only in a labor-managed Yugoslavia. Alternatively, this might be evidence of more market-oriented behavior­ by Yugoslav firms, which did not hoard excessive labor resources, as compared to enterprises in typical shortage economies (Kornai, 1980). Differences between republics and regions could suggest the existence of internal barriers in labor and capital flows.

Macroeconomic disequilibria were also visible in external accounts, for example, in the statistics of external debt (Table 3). In 1988, both reformers, Yugoslavia and Hungary, were heavily indebted. As mentioned in Section 5.1, Yugoslavia had to resort to IMF assistance and debt restructuring in the 1980s to avoid sovereign default.¹⁸

However, high external indebtedness was not limited to the reformed economies. The unreformed economies of the Soviet Union and Bulgaria were also heavily indebted. The Soviet Union de facto defaulted in 1990. Bulgaria ex­perienced two debt crises: in 1962–1964 and in March 1990.

Poland, with its only partly reformed economy, was the most indebted communist country. It defaulted on its external debt obligations in 1981. It reached an agreement with its creditors only in the first half of the 1990s.

The German Democratic Republic (GDR) also had sizable debt, mainly to the Federal Republic of Germany, which was automatically resolved after German reunification in 1990.

The main obstacle to the full and consistent implementation of a market socialism­ model was political in nature. The idea of autonomous enterprises operating in a market environment contradicted the totalitarian character of communist regimes and the political monopoly of the ruling communist parties. It was also partly inconsistent with the official Marxist-Leninist doctrine, depending on how this doctrine was implemented in ideological practice.

The disappointing experience in reforming communist economies led many scholars and reform practitioners in the region to the conviction that genuine market reforms are impossible without major changes in the political system, that is, breaking the political monopoly of the communist party (see, for example, Gaidar, 1989) and rejecting ideological prejudices, especially with respect to the private sector.

In fact, these limitations started to be gradually ignored in the last round of ­reforms of communist economies undertaken between 1987 and 1990 in Hungary, Yugoslavia, Poland, and the Soviet Union, which opened, directly or indirectly, the door to private sector development, some forms of de facto privatization of SOEs/social enterprises, building a two-tier banking sector, and engaging foreign investors. However, the genuine market transition started only after the collapse of the communist political regime, which happened in 1989–1990 in CEE, and in 1991 in the Soviet Union.

The second lesson concerned the so-called critical mass of reforms (Dabrowski, 1996). The comprehensiveness and internal consistency of implemented reforms were a basic condition of their success (Balcerowicz et al., 1981). Partial reforms risked creating a systemic vacuum when enterprises would be neither exposed to the discipline of a central plan, nor to market forces (see Section 5.1). However, they could also be simply rejected by the dominant power of the old system.

A closely related question concerned the speed of reform, an issue that was broadly and hotly debated in the context of the post-communist transition (see, e.g., Dabrowski, 1996; Havrylyshyn, 2020). However, it is relevant to all systemic and policy reforms. There are several arguments in favor of fast reforms. First, there are situations when policy actions must be bold and fast enough to stop further deterioration (avoiding a “too little, too late” reaction). Second, it is important to change expectations. This relates to macroeconomic stabilization, but also to changes in institutions, regulations, the role of government, etc., especially when previous reform attempts failed. Third, it is a political economy argument, i.e., the effective use of a political window of opportunity for reform, or the period of “extraordinary politics,” in Balcerowicz’s (1994) terminology, which is usually limited in time. Fourth, fast reforms help avoid the creation of “intermediate winners” who can block further reforms (Krueger, 1993; Hellman, 1998). Finally, fast reforms allow societies to enjoy their benefits earlier.

In terms of its agenda, the experience of market socialism reforms helped very little in setting the agenda of the post-communist transition. The latter­ could go much further than the political and ideological compromises of the 1960s, 1970s, and 1980s. Freedom for private enterprises and privatization of SOEs/social enterprises stopped being a taboo. Communist parties with their monopolies on political and economic power were dissolved, or transformed into social democratic parties. The government apparatus for central planning was dismantled. Former communist countries and their economies became open to the outside world.

In the new political and economic environment, the old ideas of decentraliz­ed state/social enterprises were largely abandoned in favor of privatization. The institu­tion of employee self-management disappeared, also in the former Yugoslavia (Uvalic, 2024). The concept of market socialism or a third way was fiercely opposed by some leading reformers, such as Vaclav Klaus, the prime minister­ of the Czech Republic, who famously said that “the Third Way is the fastest­ way to the Third World” (Klaus, 1999). On the other hand, nostalgia for past reforms did not disappear completely. It was present in most former communist countries among some intellectuals and politicians, especially of the older generation, and served as the basis for opposition to radical market transformation.

The legacy of market-socialism reforms (or their unsuccessful attempts) had to be taken into account in privatization strategies in several countries, in the form of privileged employee and management buyout schemes.