Download eastern europe:class 2

Eastern Europe and the
Former Soviet Union
Class 2:
The Transition Period
Begins January 1, 1989
• Poland launches big bang
stabilization program
• had been earlier attempts at
reform but. . .
Dimensions of
transformation under way
From planned to market
economies
Integration into global economy
Political territorial
fragmentation
Major issue re. market
economy often ignored
What kind of a market
economy are these countries
aiming for???
Liberal market economy (U.S.
model)
Welfare state (Western
European model)
Primary components of
transition to a market
economy
Privatization
change in ownership structure
Marketization
substitution of the price
mechanism to bring supply and
demand into balance and to
allocate factors of production
Integration into global
economy
Necessary to adjust internal
prices and output structure to
world market conditions
Problem
How to expand exports???
Additional issue--social safety
net problem
 Old system relied on full employment
labor market and distribution of
benefits by enterprises
 unemployment increases in transition
and enterprises cannot act as
benefactors and still compete
 state lacks the funds to increase social
welfare spending
Growth, Inflation and Fiscal Balance in
Calendar Time: All Transition Economies
5
110
0
100
90
-5
Real GDP
grow th
-10
Real GDP
(1989=100)
80
70
-15
60
-20
1989*
1990
1991
1992
1993
50
1994
1600
1400
1200
1000
800
600
400
200
0
1989* 1990 1991 1992 1993 1994
0
-2
Average
inflation
-4
Fiscal balance
(% of GDP)
-6
-8
-10
-12
1989*
1990
1991
1992
1993
1994
1989* 1990 1991 1992 1993 1994
What is responsible for
the slump in output???
• Collapse of CMEA trade
• Substantial industrial output
became uneconomic under the
new market prices
• Tighter credit restrictions needed
to control inflation made it difficult
for even viable enterprises to get
access to credit
Reservations
1. Growth, Inflation and Fiscal
Balance in Stabilization Time
110
5
100
0
90
80
-5
Real GDP grow th
Real GDP(T-4=1
70
60
-10
50
-15
40
T-4
T-3
T-2
T-1
T
T+1 T+2 T+3
T-4 T-3 T-2 T-1
T
T+1 T+2 T+3
0
1600
1400
1200
1000
800
600
400
200
0
-2
-4
Average
inflation
Fiscal balance (%
of GDP)
-6
-8
-10
T-4 T-3 T-2 T-1
T
T+1 T+2 T+3
-12
T-4 T-3 T-2 T-1
T
T+1 T+2 T+3
Inflation-Growth correlation,
average of 1992-94
Padma Desai’s perspective
• High vs. medium and low-speed reformers
• High Speed reformers got an early start
and adopted more comprehensive reform
– price decontrol
– fiscal and monetary tightening to reduce
inflation
– convertibility of currency
– trade liberalization
– privatization
Findings
BUT
Implications???
• One perspective. Not a significant
problem. Faster growth will
eventually provide more employment
• Alternative perspective. The high
unemployment rate may make it
impossible, politically, to sustain an
economic reform package before this
can happen
2.Data problems
 Prices at which goods were valued
before transition were significantly out
of line
quality of goods was typically very poor
 Need to build new statistical services.
Earlier systems set up to measure state
sector output
increasing share of output is not recorded
(unofficial economy)
incentives
How to estimate the size of
the unofficial economy???
 A macroelectric approach
 based on observed correlations
between GDP and total electrical use.
 use trends in total electrical
consumption as a proxy for trends in
the overall economy
 subtract est. of change in official
economy to estimate unofficial
economy
The example of Ukraine
Growth in
electricity
consumption
Est. GDP growth
rate
Overall GDP index
(1989-100)
Official GDP index
(1989=88)
Unofficial
economy index
1989
---
1990
1.0%
1991
-2.2%
1992
-6.2%
1993
1994
-7.8% -11.7%
---
1.0%
-2.2%
-6.2%
-7.8% -11.7%
100.00
101.0
98.8
92.7
85.4
75.4
88.0
84.7
73.3
60.5
51.5
38.9
12.0
16.3
25.5
32.2
34.0
36.6
Results for the region
Georgia
Lithuania
Official GDP
decline
Overall GDP
decline
Kazakhsta
Estonia
Czech
Poland
0
20
40
60
80
100
Recent Trends--variability
(World Bank web site)
 Poland
by 1994 real GDP exceeds 1989
GDP growth rate is 6.2%/year--199497
 Hungary
1997 14.4%
1998 5.1%
 Czech. Rep.
1994 3%
1997 0.3%
1995
6%
1998 -2.3%
 Latvia
1995 -3.1%
 Russia
1997
1998
1998
8.6%
 Ukraine
(ripple effect from Russia)
 Kazakhstan
-4.6%
-1.7%
same problem.
Financial crisis--> fall in
commodity prices-->falling GDP in
1998.