Bottom-up transformation 297 Bottom-up transformation: prerequisites, scope and impediments Horst Brezinski and Michael Fritsch Technical University Bergakademie Freiberg, Germany Introduction The fall of the iron curtain and the drastic changes in the political system of former socialist countries in Eastern Europe has led also to a collapse of the economic planning system and to a dramatic downturn of economic performance. It has become a widely shared view that in order to cope with these economic problems a transformation of the Eastern systems to a Western-type market economy is necessary. Viewing an economy as a population of firms, there are two alternatives for such a transformation of post-socialist economies: “top- down” and “bottom-up”. Whereas top-down denotes the privatization of state- owned enterprises, bottom-up characterizes the change of economic structures that is due to the establishment of new enterprises or to the development of the private firms which already exist. This paper discusses the experiences of bottom-up transformation in post-socialist countries and draws conclusions as to the most feasible and appropriate policies to be employed when implementing the transition from a command economy to a free-market system. The article provides a brief outline of the impact which new and small businesses have in Western market economies, and then derives conclusions on the role which small firms and start-ups might play in East European countries. This is followed by an analysis of the legacies of post-socialist economies in their impact on bottom-up transformation and an elaboration on the pre- requisites for a dynamic development of small enterprises in East European countries. We focus on some information on the development of the private firm sector in the post-socialist countries. Final conclusions lead to an agenda for economic policy during the period of transformation. The role of new and small firms in Western market economies In the countries of the West, small and new firms have attracted the attention of major research and of economic policy only during the past 15 years. The initial impulse was the well-known and heavily criticized 1979 study by Birch (1979). International Journal of Social Economics, Vol. 23 No. 10/11, 1996, pp. 297-310. © MCB University Press, 0306-8293 A revised version of a paper was prepared for presentation at the Seventh World Congress of Social Economics “The New World Order: Social Economies in Transition”, Verona, Italy, 3-7 August 1994. The article is based partly on the contributions and discussions at the “Second Freiberg Symposium on Economics”, Freiberg, Germany, September 1993. The papers of this conference are forthcoming in Brezinski and Fritsch (1995).