Download Chapter 1: The stylized facts of transition

Economics of Transition
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Course and Lecturers
 Every Monday morning from 9 to 11
 Ana Xavier
 Email: [email protected]
 Office hours: Tuesday 4 to 5 pm
 Greetje Everaert
• Soft Budget Constraints
 Notes on web site
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Course and Evaluation
 Written exam covers entire course = 15 points
 Case study = 5 points
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Ana Xavier and Greetje Everaert
groups of 3 to 4 people: submit groups soon
applied to one or more transition countries
analyse one topic
Background and interpret using course material
Short presentation
Submit 1st week of January
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Tutorials
 Friday morning 9-11
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3 to 4 meetings approximately and announced
depends on topics
depends on number of questions
Questions needing clarification must be handed in
previously
 Damiaan Persyn
 Email: [email protected]
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Course Index
Chapter 1: The stylized facts of transition
 Chapter 2: Output collapse, Reallocation,
Restructuring and Market Selection
 Chapter 3: Soft Budget Constraints in Transition
 Chapter 4: Privatization
 Chapter 5: Competition in transition
 Chapter 6: Globalization and Enlargement
 Chapter 7: Unofficial market for health care in
transition countries (if there is time!)
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Chapter 1: The Stylised Facts
of Transition
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Transition - Definition
“The process from socialism to capitalism in former
socialist economies” - Roland
Gorbachev’s Perestroika
Fall of the Berlin Wall in 1989
Collapse of communism and Soviet economic system
A move from central plan to market economy
Large-scale institutional change
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Transition - Definition
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A complex economic and social process = systemic
change:
• law, rules and norms according to which agents
(government - central and local, firms - state, private,
foreign, households or individuals) interact
• organisations: economic, political, etc.
• change from one party only regime to pluralism/
democracy
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Transition Countries
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Central and Eastern Europe:
• Albania, , Bosnia and Herzegovina, Bulgaria, Croatia, Czech
Republic, FR Yugoslavia, FYR of Macedonia, Hungary, Poland,
Romania, Slovak Republic, Slovenia
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Baltic States:
• Estonia, Latvia, Lithuania
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CIS:
• Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan,
Moldova, Russian Federation, Tajiskistan, Turkmenistan, Ukraine,
Uzbekistan,
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Asia:
• China, Vietnam
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Map of EU and EU Candidates
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Centrally Planned Economy in a
Simplified Way
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Fixed prices, quantities and quality
• absence of markets and prices as in market economy
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Central administration (ministries) planned
production and exchange
• defined the where, what, to whom and from whom.
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Certain production incentives
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output targets,
state financing
employment
investment
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Centrally Planned Economy in a
Simplified Way
 distortion:
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large firms,
heavy industry and few services,
no cost minimisation,
input mismatch and thus shortages or excess supply,
low quality products,
workers bargaining power
bad unfinished investment
hidden slack
Complex planning  large information capacity
• overestimated
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Pre-Transition Reforms
Yugoslavia introduced self-management in 1965
 Hungary abolished mandatory planning in 1968
 Poland similar reforms in the 1980s
 USSR under Gorbachev
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Allowed for more enterprise autonomy
but kept subsidisation
macroeconomic imbalances
need for stabilisation policies
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Transition Reforms
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Liberalisation (to improve
allocative efficiency and
correct incentives):
• prices
• international trade
• markets: e.g entry of new
firms
Stabilisation (correct
imbalances):
• inflation
• deficit
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Organisational (to correct
incentives in organisations
and create adequate
organisations):
• mass privatisation
• regulation
Institution building (enforce
law, contracts, property
rights)
– competition authorities,
central banking, financial
intermediation
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Importance of Transition
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One of the important events of
20th century
10 years +
Affected 1.65 billion
Changed economic institutions
and people’s economic
conditions
Expected to bring about
prosperity and growth
EU Enlargement; CIS region and
Asia
Longer than expected
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Success but unexpected failure:
• liberalisation
• privatisation
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Controlled experiment
• understanding capitalism and
• large-scale institutional change
• evolution of a system
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Debate about reforms
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importance of institutions
political economy
initial conditions
gradual vs big bang approach
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Transition Process
Based on general economic theory
– Assumed markets and organisations existed
– no transition literature existed
No road map:
– What to do first
– entry - privatisation and liberalisation - restructuring?
– How?
– Mass privatisation vs sales
– Exchange rate mechanism
– At what speed: big bang vs gradualism
Uncertainty and goal not entirely clear
Political constraints and process
Complementarity
Reforms did not have same speed across countries! In some
cases lost momentum!
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Implications
GDP
 Employment
 Inflation
 Productivity
 Income distribution
 Health
 FDI
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The evolution of GDP (1991-2000)
1,6
1,4
1,2
Poland
Romania
Bulgaria
Slovak Republic
Czeck Republic
Hungary
Estonia
Slovenia
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0,8
0,6
0,4
0,2
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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Evolution of Employment
(1990-2000)
1,1
1,05
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Poland
Romania
Bulgaria
Slovak Republic
Czeck Republic
Hungary
Estonia
Slovenia
0,95
0,9
0,85
0,8
0,75
0,7
0,65
0,6
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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Evolution of productivity
(1991-2000)
1,8
1,6
1,4
1,2
Poland
Romania
Bulgaria
Slovak Republic
Czeck Republic
Hungary
Estonia
Slovenia
1
0,8
0,6
0,4
0,2
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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Evolution of inflation (1991-2000)
1.400,0
1.200,0
1.000,0
Estonia
Poland
Slovenia
Bulgaria
Romania
800,0
600,0
400,0
200,0
0,0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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Evolution of FDI (1991-2000)
10000
1000
Poland
Romania
Bulgaria
Slovak Republic
Czeck Republic
Hungary
Estonia
Slovenia
100
10
1
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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Basic Facts
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Initial collapse of output, employment and productivity
• different groups identified
• U-shaped (except for employment in some)
• Not all recovered to pre-transition levels
Mass privatization programs were implemented in
most countries
 Emerging Competition
 Soft budget constraints persist
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– wage and tax arrears
– bad debt
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Positive FDI flows
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Other issues
 Hard times for women
 Non-democratic systems
• see http://www.freedomhouse.com/
 Poor respect for human rights
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