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Transcript
THE ECONOMICS OF TRANSITION Central and Eastern Europe ref: transtnplus332cbs march 2010 Objectives By the end of this lecture students should: be aware of the characteristics of a transition economy and major macroeconomic trends understand why western economic policies were not be directly applicable be able to understand and explain why some Central European Economies (CEEs) were able to join the EU, while others were not BACKGROUND Planned economy v market economy Performance of transition economies Macroeconomic stabilisation & Microeconomic (institutional) reforms How economic theory explains ‘U’ shaped response to output How relevant is western macroeconomics? TRANSITION (transformation) Change from a centrally administered economy (CAE) to a market economy (ME) Main issues considered here -see handout – – – – – property rights domestic prices domestic output & employment financial institutions budget revenue Hard Budget Constraint (HBC) -Kornai ‘The Socialist System’ INITIAL PERFORMANCE OF TRANSITION ECONOMIES See handout with data Progress in transition inflation output unemployment budget Poland(1st 1/1/90),Romania, Russia STABILISATION POLICIES Similar menu in countries. Choose speed and sequence Initial fall output in all countries - bigger than expected Macroeconomic stabilisation Microeconomic (structural) reforms For CREDIBILITY -simultaneous announcement (Macro) Stabilisation package Price liberalisation -cornerstone of ME Macroeconomic stabilisation – low inflation - Restrictive monetary policy – Incomes policy – Balance budget Foreign trade liberalisation Structural measures: institutional reforms (micro) Market environment – – – – banking sector financial sector tax structure commercial law Privatisation Others APPLICATION Initial debate : – Shock therapy v gradualism – Sequencing Debate late 1990s; why did output fall sharply? – See O Blanchard ch2 for relevant theory How do we achieve future sustainable growth? Transformation traps (Portes, 1994) – overemphasis on macroeconomic policy – inadequate micro foundations – financial intermediation not developed Macroeconomic policies Some argue tight macro policies lead to fall in output Others (Blanchard, Begg); macro policies not the principal driving force Sound macro fundamentals necessary but insufficient for stabilisation (Begg) – may be undermined by inadequate structural reform Example: monetary policy A major transformation trap - not recognise key role of banks (Portes) » transition banks learning the market system (ab initio) mistakes in lending Eg1.Firms avoided HBC – undermines interest rate as instrument of monetary policy Eg2.Composition of credit distorted Eg3. Higher interest rates - - - increased loans ! – adverse selection problem LATE 1990s/ 2000s 3 CEECs, (Poland, Czech, & Hungary), in particular strengthened the performance of market supporting institutions, – Successful transformation to market economies – GDP rose above pre-transition levels Similarly for Baltic states & Slovenia EU accession countries SE Europe & Russia - lagging Some CAEs have still not reformed sufficiently to enter the EU Divergent patterns of economic reform mirrored by political reform (EBRD 2003) – Thus, political reform & credibility are vital Post accession: consider benefits/costs to CEEs & EU Include; – Budget – Competitive pressure on EU15 & EU global competitiveness » Anglo-Saxon / French /Nordic approaches in EU? » Opportunites and threats for EU15 – – – – Agriculture Structural funds Migration Voting & decision making – FDI – Trade flows Credit Crunch & CEECs – EBRD Transition Reports - Good source CONCLUSION The nature of CAEs & market economies varies significantly This summary indicates that stabilisation policies were important, and a lack of structural reform was a major feature Credibility of reforms important Output initially fell further than expected, but did recover in CEECs Additional references Refs for Fiscal & Monetary policy Begg,’Monetary policy during transition; progress & pitfalls in Central & Eastern Europe,Oxford Review of Econ Policy,vol 13,no.2 ,1997 Buding & Van Wijnbergen,’Fiscal policies in Eastern Europe’ as above Papazoglu et al, ‘Potential trade effects of the 2004 enlargement’, World Economy 2006