Table 1.

5 Unemployment in eastern Europe, 1990-95 Percentage of civilian labour force, end of period : unemployed 1990 1991 1992 1993 1994 Bulgaria 1.6 11.7 15.6 17 17 CSER 1.0 6.8 5.1 Czech Republic 2.6 4 8 Slovak Republic 10.4 15 18 Hungary 1.6 7.5 12.3 13 13 Poland 6.1 11.5 15.0 14 14.4 Romania 2.7 6.2 9 15 Sources: National sources: OECD estimates labour markets too fell under the law of supply and demand and international competition. This situation is further illustrated by Figure1.2, which shows the rate of unemployment in Poland from 1988 to 1998. Price stability Inflation is a generalized and persistent rise in the price level. The annual inflation rate is the percentage increase per annum in the average

1995 16 8 18 12 14 15

price of goods and services. The retail price of index (RPI), a weighted average of the prices which households pay for goods and services, is used in the UK to measure inflation. What we normally refer to as the inflation rate is the percentage annual growth in RPI. Fluctuations in the general level of prices can cause harmful distortions in the economy. They particularly affect the level of production, the distribution of real

Figure 1.2 Unemployment rates in Poland, 1988-98

1 2 1 0 8 6 4 2 0 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8

Unemployment rate %

1 4

UK (8.7) Average (5.6)

Source: Adapted from OECD statistics

Table 1.6 Inflation rates selected countries, 1994-6 income and balance of payments situation. A rapid increase in prices reduces: 1 the real income of those on those on fixed money incomes, relative to those whose incomes are rapidly adjusted to the changing price level; 2 the purchasing power of savings; 3 the real burden of debt, so that debtors repay less in real terms than they borrow. Inflation increases the prices of exports and makes them less attractive to foreigners, so that balance of trade deficits will emerge if the currency exchange rate is fixed. Alternatively, if the exchange rate is flexible, domestic inflation will cause a depreciation of the exchange rate, which in turn may be inflationary. All government are therefore concerned to hold prices steady and to eliminate or reduce such harmful developments (seeTable1.6). In many ways, the decreasing importance attached to control of unemployment has been mirrored by an increasing concern with controlling the rate of price inflation. In the 1950s, and 1960s, moderate levels of inflation, between 2-4 per cent per annum, were the norm in most western countries. This was known as creeping inflation. But in the 1970s, inflations rate in a number of western countries increased dramatically and for brief periods, in particular after the oil price shocks of 1973 and 1979, when inflation exceeded 20 per cent in some cases. Government throughout the west, but particularly in the USA and UK, began to attach the greatest important to controlling the rate of inflation. President Reagan described inflation as public enemy number one, why in the UK, Prime Minister Margaret Thatcher saw the control of inflation as a prerequisite for any sort of economic success.
Average last 15 years Japan WG USA France Canada Britain Italy 2.6 3.3 5.6 6.8 7.2 7.9 10.7

1994

1995

0.7 2.7 2.6 1.7 0.2 2.5 3.1

0.1 1.8 2.8 1.7 2.2 3.4 5.4

0.1 1.5 2.9 2.0 1.6 2.4 3.8

Source: Derived from OECD statistic Note Average includes: Japan,WG,USA,France,Canada,Italy

Activity 1.6 Study Figure 1.3 and describe the trends in Britain compared with the average trend of the six major industrial economies over the same period. Answer 1.6 Inflation in the UK reached its peak in 1980 when it stood at about 18 per cent. The contractionary monetary policies introduced by Margaret Thatcher in the early 1980s brought inflation under control. By 1985, inflation was down to 6 per cent, it fell again to just over 3 per cent in 1986 only to restart its ascent in the second half of the 1980s as government policies had become less restrictive. In 1990 the spectre of inflation, by then disappointingly high (9.5 per cent), was back the top of the political agenda and the fight against it was resumed with renewed vigour. The first part of the 1990s saw inflation brought under control once more, down to 2.4 per cent by 1996. The same pattern, although less jagged, has been followed by the other major industrialized

countries; among them Japan and Germany are the least inflationary countries. In Japan in 1995 the rate of inflation was negative, which means that the average price level actually fell. Germany recorded a low 1.5 per cent in 1996, followed in Europe by France with 2.0 per cent. If we compare the recent rates of inflation with individual countries averages over the last 15 years, we see that for all of them the trend is distinctly downwards. By the mid-1990s in western Europe, the rates of inflation had been reduced to rather modest levels, typically less than 5 per cent per annum. In central and eastern Europe, however, the newly marketized economies such as those of the former Soviet Union experienced high rates of inflation. Moreover, as we have just seen, these high rates of inflation were coupled with high levels of unemployment as the forces of a market system began to bite. Activity 1.7 Study Figure 1.3 and describe the trends in Poland. Answer 1.7 As Figure 1.4 shows, inflation in Poland reached explosive levels, almost 600 per cent, after liberalization, in 1990. Remember, 100 per cent inflation means that prices have doubled over the period. A 600 per cent annual rate of inflation indicates that prices have increased sixfold in a year. Since 1990, inflation has been brought under control, gradually coming down to a more acceptable 15 per cent in 1997.