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Eastern Europe, David Lipton
2 paragraphs found.
 

Moreover, attempts to subsidize certain economic activities left all the countries with heavily distorted pricing structures. Prices for energy and household necessities (mainly food and rent) were kept very low. Another factor that distorted prices was the overvalued domestic currency. It was kept so overvalued that it could not be converted into foreign currency. Instead, governments rationed the limited amount of foreign exchange available. Those not receiving official exchange usually had to pay much more to buy dollars in the black market. Therefore, most imported goods were severely rationed or available only at high blackmarket prices.

 

The genesis of the financial crises came from deep within the system. Subsidies ballooned as governments tried to keep the prices of many consumer products and services low for households and tried to keep profits high in state enterprises (where managers were too willing to grant excessive wage increases). Credits to enterprises also ballooned in support of the huge appetite for investments on the part of state enterprises (where managers craved investment projects that might add to their power and prestige). Subsidies and credits were paid by printing money, which led to a steady buildup of demand throughout these economies. The ballooning of demand created shortages wherever price controls were inflexible, inflation wherever prices were allowed to rise, and external debt and balance of payments crises in most countries. The buildup of demand in Poland, for example, can be seen clearly in the gap between the black market exchange rate and the official one, which rose from 250 percent in early 1988 to 500 percent in mid-1989.