Download Economic Development Of Eastern Europe

ECONOMIC
DEVELOPMENT OF
EASTERN EUROPE
By:
•Robert Danilczuk
•Dariush Pourhosseini
•Sean McDermott
•Steve Sheath
•Peter Wietlicki
Introductory Presentation
Question
Would moving to a market
economy from a planned
economy harden the budget
constraint?

Understanding soft budget constraint Janos Kornai
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et.al
•Stylized
explanation of SBC syndrome
•BC
(budget constraint) organization and Sorganization (supporting)
•BC organization makes loss and S- organization helps
it out with its financial problems (bailout)
•Motivations
(e.g.. To recoup past investment, economic
spoillover effect i.e. chain of bankruptcies)
•Review of different models and empirical results for the
SBC
Credit and Efficiency in Centralized and
Decentralized Economies - M. DEWATRIPONT and E. MASKIN
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Asymetric Information. - Creditors do not know
which projects are good or bad.
Centralized economy- banks refinance due to
significant sunk costs and social surplus.
Decentralized economy- bad projects may not be
refinanced. This Provides financial discipline
This model contains the basis of the ‘soft budget
constraint’ problem.
FEDERALISM AND THE SOFT BUDGET CONSTRAINT
YINGYI QIAN AND GERARD ROLAND
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The Model
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Firm can either privitise,restructurise or wait for support depending on the expected response of the government
Assumptions
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Each region of a country is equal
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Little restrictions to capital flow between regions
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Small mobility of capital between countries
Fiscal decentralization leads to hardening budget constraint
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Regional competition for foreign capital
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Local government not willing to subside (or bailout) enterprises
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Higher wellfare level (firms pay more in taxes)
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Allocative distortion
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Will only be true if the effect of competition for monetary grants exceeds the softening effect of increasing budget due to
monetary finance
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The cost of Fiscal decentralization and monetary centralization is inflation
Fiscal centralization softens the budget constraint
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The cost of bailing out less then its benefit
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Under investment
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Less allocative distortion
Machiavellian Privatisation (2002)
What is “Machiavellianism”’:
• “The political doctrine of Machiavelli, which denies the relevance of morality in
political affairs and holds that craft and deceit are justified in pursuing and
maintaining political power”

Assumptions:
1.
Political Party needs to Right wing/ Market Orientated
2.
Inequality must be present in the economy, Median income< Average mean income
3.
Shares need to be allocated evenly or more towards to median voters
If the privatisation has been successful the political views of the median voters
should have been shifted towards the right, hopefully causing the Right wing
party to be elected.
Machiavellian Privatisation (2002)
Examples of situations where Machiavellian privatisation may have occurred
Any Questions? (Seriously ask Pete something he’s
like proper clever)
Appendix
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Machiavellian PrivatizationBruno Biais and Enrico Perotti
Creating a Market Economy in
Eastern Europe: The Case of
Poland Understanding the Soft Budget
Constraint - János Kornai, Eric
Maskin, Gérard Roland
Federalism and the Soft Budget
Constraint – Yingyi Qian,
Gerard Roland