Download 17. Transition - Ohio Wesleyan University

Economic Systems
Ohio Wesleyan University
Goran Skosples
17. Transition
Transition
 not a _______ of the existing system, but a
_______________ of the current system with a
new system
 involves virtually all aspects of the economy:
micro-, macro-economics, property rights, legal
institutions, trade, social safety net, financial
sector,...
 vast differences among transition countries (@
30) –
 similarities –
1
Commonalities
1. Coordination via the _______
2. demand and supply not in equilibrium 
____________________
3. no institutions that could support the
market (____________, ____________
_______________, ...)
4. prices did not reflect scarcities
5. entry into economic activity was controlled
6. limited private property
7. control of foreign trade
2
Dimensions of transition
 Microeconomic
• market creation and price liberalization
•
•
property rights
firm restructuring and privatization
 Macroeconomic
• stabilization
• budgetary finances
• financial sector reform
3
Output in transition countries
4
Output in transition countries
Country
Consecutive
years output
decline
Cumulative
output
decline (%)
Real GDP, 2000
(1990=100)
Hungary
4
15
109
Poland
2
6
112
Romania
3
21
144
Armenia
4
63
67
Georgia
5
78
29
Russian Federation
7
40
64
Output decline during the Great Depression (1930-34)
France
3
11
UK
2
6
US
4
27
5
Why did output collapse?
 disintegration of the coordination structure
•
 increase in price of __________
 decrease in trade within the “Soviet bloc”
• dissolution of the Council for Mutual Economic
•
Assistance (CMEA)
new goods from the west
 shadow economy
 accounting errors
6
Steps of transition
1. Stabilization
• severe macroeconomic problems
a) high inflation (hyperinflation)
- monetary overhang
- currency flight (usually DM and the US dollar)
- inflationary tax
b) sharp decline in GDP
- ↓ @ 30% GDP in the US during the Great
-
Depression
reasons already mentioned
7
8
Steps of transition
c) employment
- did not decrease as much as output?
- instead, productivity decreased, which allowed for
a ________ decrease in employment than output
2. Price liberalization
• problematic in the SR
• more beneficial in the LR
• hurts less affluent more
• danger that large firms will exercise their
monopolistic power
- could be ________ or _____________________
___________________
9
Steps of transition
3. Enterprise reform
• corporatization
• independent management
1. defined goals of the enterprise
2. removal of the social function from production
•
firms
3. accounting reform
4. proper incentives
privatization  transfer or ownership
- private ownership can utilize the resources more
-
efficiently
who gets the ownership? how is this to be done?
who has enough capital? what should be the
value?
10
Privatization
 Desirable characteristics
1.
2.
3.
4.
rapidity
improved governance
fairness (equity)
further investments (capital, technology,
innovation, management skills)
5. sustaining the overall stabilization and
liberalization program
6. revenue for the state
11
Privatization
12
Privatization Comparison
 Is privatization the same in transition economies
as in established capitalist economies?
• _____ privatization vs. _________ privatization
• Can a product or service to be privatized be
clearly identified?
• Is the legal infrastructure is established? Can
contracts can be written, monitored, and
enforced?
• Are markets and financial arrangements
present? What is the value of the firm?
• Can outcomes can be assessed?
13
Steps of transition
4. Financial sector reform
• monobank vs. two-tiered bank system
-
•
monobank: credit granting + plan oversight
two-tiered:
– commercial banks: channeling funds from
savers to investors, risk evaluation, etc.
– central bank: controlling banks, the overall
economy
stock markets
- very _________
- usually considered a consequence of development
rather than a cause
14
Policy Effectiveness
 How effective can a central bank be in regulating
the macroeconomy?
• the banking system is limited
• firms do not obtain much funds from banks
• ____________________ are not well established
• problems of policy objectives is magnified as
compared to market economies (the economy is
more fragile)
• _______________ and _________________
15
Steps of transition
5. International trade
• previously determined by the plan, not
•
•
•
individual firms
transition liberalized trade, but protection tariffs
and licensing were put in place
currency reform  convertibility + access
- realistic exchange rate
foreign direct investment (FDI)
- needs clear property rights, consistent tax laws,
-
reparation of profits
high inflow of FDI required sterilization policies
16
Steps of transition
6. Social safety net
• during socialism, non-wage benefits provided
•
•
•
through work
unemployment hidden – actually existed, but
people still employed
inevitably, unemployment increases during
transition  need to create a safety net
- guarantees some minimum standard of living
- prevents creation of an underclass
- prevents development of crime, prostitution...
- helps workers find the right job match
__ levels of well being + __ inequality
17
Legal system
 property law
• use of property, transfer property, right of control
 contract law
• clear definitions of business party conducts and
•




remedies
consumer laws
bankruptcy law
anti-monopoly law
intellectual property law
etc.
18
Speed of transition
 Big push
• all at once and painful
•
•
•
- all prices liberalized at once
- rapid privatization
change the system as fast as possible and so it
cannot (before it can) be undone
the Washington Consensus
- 10 “simple” policy prescriptions
- very controversial
Poland, some other CEE countries
19
Speed of transition
 Gradualism
• it takes time to change institutions and laws
• realization that transition is complex
• sequencing and complementarities
• experimentation might be warranted
• could be reversed (political commitment issues)
• Hungary, China
20
Initial conditions
 if rules/institutions are lacking, things are done
according to tradition
 legacies of central planning
• trade patterns
• allocation of inputs/capital
• ownership of resources
• length of socialism  socialist culture
- socialism was present in Russia since 1917 and in
Eastern and Central Europe since WWII
 level of development
• agriculture vs. industry
• per capita income
21