Download EC225 Russian Industrialisation Part 6. Shortage Economics A B

EC225 Russian Industrialisation
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Spring Term, 2003/04
Part 6. Shortage Economics
The purpose of these lectures is to introduce the ideas of János
Kornai (1980), The Economics of Shortage. Kornai is like
Keynes in the sense that nowadays everyone uses his ideas,
especially the concept of the “soft budget constraint”, often
without knowing where they come from.
Planners
mobilise
resources
Soft budget
constraint
A
Planners
limit firms’
inefficient
behaviour
Firms behave
even more
inefficiently
Firms adapt
to input
shortage
The purpose of this lecture is to cover the initial loop in the
economics of shortage:
Loop A. The Creation of Shortage
Planners
mobilise
resources
Planners
limit firms’
inefficient
behaviour
B
Firms behave
inefficiently:
excess demand
for inputs
Lecture 5. Shortage
Microeconomics
Slow
growth
A
Soft budget
constraint
Firms behave
inefficiently:
excess demand
for inputs
§ Shortage phenomena of everyday life under state socialism
§ These are macro phenomena but they have micro
foundations
§ Not aggregate excess demand, but the enterprise’s soft
budget constraint.
Consumer
shortages
Key:
Loop A shows the creation of shortage
Loop B shows the firm’s adaption to shortage
Overview
Hare, Paul G. (1982), “Economics of Shortage and Non-Price
Control”, Journal of Comparative Economics, 10(4)
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2
The Soft Budget Constraint
Motivations and Results
Figure 1
Q1
K
Motivations
§ Planners: control over resources, i.e. “mobilisation”
§ Producers: accumulation of slack
Effects on the Firm
Figure 2
B•
Income
A•
U1
Income
function
L
The diagram shows the firm’s planned budget constraint.
Consistent with this budget constraint the firm is allocated
planned factor inputs A to produce planned output Q1 . The
firm prefers to produce Q1 using the actual allocation of factor
inputs B if it can be achieved ex post.
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Effort
Other things being equal, the firm’s utility is always increased
by a increase in its stock of factors of production that is
hidden from higher authority.
4
Effects on Planning
Since rationing by price was ineffective, economic regulation
took the form of nonprice controls, i.e. quantitative regulation
of the firm from above.
This was a consequence of firms’ behaviour under a soft
budget constraint: otherwise, the firm would have grabbed
resources without limit, and aimed to produce nothing at all.
The purpose of planning and issuing targets and quotas was
fundamentally coercive: to force producers to produce with
the resources allocated to them.
Lecture 6. Shortage
Macroeconomics: Investment
Hunger
The purpose of this lecture is to cover a second loop in the
outline:
Loop B. Adaptation to Shortage
Planners
mobilise
resources
Planners
limit firms’
inefficient
behaviour
A
Soft budget
constraint
Firms behave
inefficiently:
excess demand
for inputs
B
Firms behave
even more
inefficiently
Firms adapt
to input
shortage
Slow
growth
Consumer
shortages
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6
Instantaneous Adaptation:
Concealing Underfulfilment
Short-Run Adaptation: Gaining
Hidden Reserves
The context of coercive plans and pervasive shortages had
consequences for producers. The outcomes can be viewed as
strategies of adaptation to shortage over various timescales.
First problem was that of instantaneous adaptations to input
shortages:
§ forced substitution to find an inferior substitute for the
missing input, e.g. lower quality material, fuel, or labour,
lower specification components
§ concealment , i.e. violate the output plan by quantity,
quality, or assortment, but hide the shortfall by fraud and with
the collusion of purchasers who are also desperate for supplies
and willing to accept forced subsitutes themselves.
In the short run, the firm would respond to context of input
shortages by:
§ complaining that actual allocations are insufficient,
§ exaggerating current input requirements, and
§ accepting everything offered,
so as to build up concealed reserves against future
requirements.
In this way firms would conceal their potential capacity.
Importance of concealment: the firm’s hoarded inputs would
represent a safety factor only while they could be concealed
from higher authority.
Because of concealed underfulfilment and concealed
capacity, supplies to intermediate and final users of output
would always fall short of the plan in both quantity and
quality; the demands on intermediate goods, although in
theory limited by the plan, would in practice be virtually
limitless.
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8
Long-Run Adaptation: Overinvesting,
Underperforming
§ Investment hunger
§ Overbidding
§ Underperforming
Overinvestment combined with underperformance formed
another twist in the shortage spiral, ensuring high investment
costs combined with mediocre capital productivity.
Table 1. Investment and GDP growth, Selected Countries,
1950 to 1979
Romania
Bulgaria
Soviet Union
Poland
East Germany
Czechoslovakia
Hungary
Unweighted
mean
Greece
Italy
West Germany
Netherlands
Canada
Australia
Finland
Norway
Sweden
Unweighted
mean
GDP
growth,
% per year
Investment
growth,
% per year
5.81
5.43
4.95
4.12
3.77
3.67
3.64
11.33
10.89
8.02
9.70
8.52
6.11
8.85
Investment
growth,
% of GDP
growth
195
201
162
235
226
166
243
4.48
6.20
4.92
4.85
4.58
4.57
4.54
4.48
4.15
3.69
9.06
7.16
4.79
5.69
5.10
4.36
4.43
4.54
4.93
4.18
204
115
97
117
111
95
98
101
119
113
4.66
5.02
107
Source: taken or calculated from Kornai (1992), 168.
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Limits on Adaptation
Planners wanted to pass the costs of producer opportunism
back to producers. They could not do so in the market way,
which was to drive opportunistic producers from the market
by means of competition. There was no competition, and no
producer was ever driven from the market.
§ Setting the plan: the ratchet, or planning “from the achieved
level”
§ Fulfilling the plan: rewards and punishments
Lecture 7. Shortage
Macroeconomics: Siphoning
The purpose of this lecture is to cover the final links in the
economics of shortage:
Planners
mobilise
resources
Planners
limit firms’
inefficient
behaviour
A
Soft budget
constraint
Firms behave
inefficiently:
excess demand
for inputs
B
Firms behave
even more
inefficiently
Firms adapt
to input
shortage
Slow
growth
Siphoning
Consumer
shortages
How should we explain consumer shortages in the Soviet
economy? This shows exactly what it is that shortage
economics adds to the traditional armoury of economics. On a
first pass a traditionally minded economist would naturally
seek to explain consumer shortages in terms of price controls
and repressed inflation.
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12
Repressed Inflation: Cause or
Symptom?
Repressed Inflation: Some Doubts
Why Does Repressed Inflation Matter?
Distinguish between reported, hidden, and repressed inflation.
When the three are added we find the inflation that would be
observed if it were correctly measured and in the absence
of price controls.
The importance of repressed inflation is that it creates a
rising monetary overhang which can itself feed back into
inflationary pressure.
Repressed inflation arises when shortages in the retail
market result in households’ forced saving: households
accumulate unspent cash that is unwanted, and the unspent
cash can grow from year to year.
This can have two serious consequences (1) effort is
discouraged, and/or (2) the inflationary pressure can explode.
What Cures Repressed Inflation?
§ Market-economy context: liberalise prices.
§ Shortage -economy context: liberalising prices may only
increase siphoning and not reduce excess demand.
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According to Kornai repressed inflation is possible but not
inevitable in a shortage economy. In theory inflationary
pressure can be soaked up and repressed inflation avoided by:
§ forced substitution, and/or
§ secondary markets where goods and services are traded at
unregulated prices.
Forced Substitution
§ Gur Ofer and Richard Pickersgill: Soviet household saving
may have been voluntary
§ If saving was voluntary, then why queues and waiting lists?
Richard Portes: shortage of retail and distribution services.
Secondary Markets
§ Mario Nuti: the second economy can soak up excess
demand and stimulate effort.
Was Siphoning Technically Possible?
§ Siphoning was a theoretical possibility, but some argued
that Soviet firms could not turn non-cash money in state bank
accounts into anonymous cash for siphoning.
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Kim (1999): the official statistics, even those rebuilt by
western scholars, overestimated household consumption and
underestimated household saving. This is because:
§ on the income side, household second- market income
sources were understated
§ on the expenditure side siphoning really did take place but
was conc ealed; as a result more cash ended up in the hands of
households and less in the hands of firms
§ household investments, especially in livestock and housing,
were ignored.
How Much Saving?
When corrected data are used, we find that household saving
was much higher (figure 1) than previously estimated
Figure 1. Soviet Personal Saving: Alternative Estimates,
1963-1989 (per cent of household income)
How Large Was Overall Shortage?
Figure 2. Soviet Households’ Forced Saving and the
Monetary Overhang, 1964-91
70%
60%
50%
Per cent
There Was Repressed Inflation;
Siphoning Did Happen
Annual forced saving/
annual monetary
saving
40%
Total monetary
overhang/ total money
stock
30%
20%
10%
0%
1965
1970
1975
1980
1985
1990
Source: Kim (1999).
§ Retail shortage is measured by
 household income



 official retail stocks

secondary
retail
trade



total retail trade 
§ The degree of shortage significantly affected saving.
§ The monetary overhang grew rapidly after 1964 to about 18
per cent of the total money stock by the end of the 1970s, then
stabilised until 1985 when it began to rise again, doubling by
1991 to 38%.
§ Implied increase in the price level in 1992 required to
1
eliminate the overhang is 61 = 100 × ( 1− 0.38
– 1) per cent
(figure 3).
§ When liberalised, prices actually rose by 245 per cent.
§ Difference can be explained by simultaneous removal of
retail subsidies and flight from money (figure 4): that is, cash
stocks that were previously desired also became unwanted.
Source: Kim, B.Y. (1999), “The Income, Savings, and Monetary Overhang of Soviet Households”, Journal of
Comparative Economics, 27. CD (FBS) = converted data from the Soviet family budget survey. OS & IMF =
official statistics also used by the IMF.
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Figure 3. Repressed Inflation: Aggregate Supply and Demand
P
•
A
Y
Figure 4. Repressed Inflation and Removal of Subsidies
P
•
A
Y
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