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Economics of Transition Barry W. Ickes Spring 2007 What is Transition • Transition is development economics from different initial conditions – Developing economies start poor – Transition economies were poor countries that adopted strange institutions to develop – The key question of transition economics is how to get back to the normal road of economic development • Without having to double back Founding Fathers Magnitogorsk Chelyabinsk Tractor Factory Norilsk Gdansk Shipyards Antonov Berlin Wall Transition Transition Figures Comparative Economics vs Economics of Transition • The study of comparative economic systems was much like economic pathology. – We studied how economic systems that were "sick" operated. – What happens to the economic system when its nervous system is seriously distorted? • Economics of Transition is then the study of therapy: ∙ – How does an economic system suffering from such pathology recover? – It is the study of restoring the health of an economic system. Evolution and Transition • Compelling issue of transition economics is that simply removing distortions and impediments to markets does not accomplish the task of economic renewal. – Institutional change is complex and painful • Development is the process of turning a less complex organism into a more complex one • Transition is very different. – It can be likened to changing the organism from one type to another • Transition economies differ in terms of how long they spent on the “wrong” path Human Evolution neanderthal homo sapien homo habilis Economic Evolution capitalism socialism pre-industrial economy The main ingredients of the transition process • • • • • Liberalization Macroeconomic stabilization Restructuring and privatization Legal and institutional reforms But what order and what to emphasize first? Some Transition Puzzles • The Output Fall – The Uzbek Growth Puzzle • Returns to human capital • Re-demonetization • Value destroying activities are retained – Difficulty of eliminating soft-budget constraints • Geography matters – The Great Divide • Privatization and efficiency Transition Questions 1. Do differences in transition outcomes reflect primarily reform strategies or initial conditions? Is it necessary to begin with liberalization and stabilization? How crucial is privatization to marketization? Does transition require that a gulf emerge between winners and losers? Is there only one path that the transition can take? Or are there alternatives to the Washington consensus? How long will the transition last? 2. 3. 4. 5. 6. • When is transition over? Inflation by Region GDP in CEE’s Figure 1: Official GDP Growth in Central and Eastern Europe 140.00 130.00 120.00 1989=100 110.00 100.00 90.00 80.00 70.00 60.00 50.00 1989 1990 1991 1992 1993 1994 1995 1996 1997 ALBANIA BULGARIA CROATIA CZECH REPUBLIC POLAND ROMANIA SLOVAK REPUBLIC SLOVENIA 1998 1999 HUNGARY 2000 GDP in FSU Depth of Transition and Distance from Brussels Current GDP and Distance to Brussels Evolution by Region China and India in the Long View 3500 3000 2500 2000 1500 1000 500 0 1700 1820 1870 1913 India 1950 China 1973 1998 Chinese Poverty
