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RESEARCH PRODUCT

ON THE ONSET OF POST-COMMUNIST INDUSTRIAL DEVELOPMENT IN CENTRAL AND EAST EUROPEAN ECONOMIES

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In the course of the last twenty odd years, Central and East-European economies have been striving to reform an inherited flawed trade structure, in an attempt to increase their industrial competitiveness and improve their position within the international division of labor. The respective countries have gone through an industrial metamorphosis that swept away the legacy of socialist autarky, making them better-equipped to deal with globalization challenges. The dismantling of the COMECON forced CEEs to institute severe constraints on public budgets; as a consequence, the price of physical capital edged up relative to the price of labor thereby making the respective economies relative abundant in labor. This prompted manufacturers throughout the economy to substitute labor for physical capital in production. Yet factor substitution does not occur identically because the elasticity of factor substitution varies among industries: in the labor-intensive sector, since manufacturers were able to substitute labor for physical capital in production more easily, legions of extra workers were employed and production rose. By contrast, in the physical capital-intensive sector, the ability to offset the rising price of physical capital by hiring extra labor is technologically limited; consequently, enterprises, though grappling with the obsolescence of old technology had no alternative but slash production or close downimplications and conclusion.