Transcript What do Economists Know about Transition to a Market System?

What do Economists Know about
Transition to a Market System?
Lawrence R. Klein
Susan Yang & James Durda
Central Planning
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Marxism-Leninism
The Labor theory of value influenced social
accounting
Theory of complete state ownership was used to
determine input, output, and prices of goods.
INFLATION
Printing too much paper money leads to problems
(Central planners should be able to seek great
economic outcomes, but this did not happen.)
Competitive Economy
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Each firm pursues own interests, maximizing profits.
Walras theorized an equation for all supplies and demands.
This is known as Market Clearing. S(p1…pn)=D(p1…pn)
The Market Clearing solution does not provide adequate
information.
These are the assumptions:
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Free entry
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Equal access to economic info
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Rational agents
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Absence of monopoly or monopsony power
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Absence of natural disturbances
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Full employment of people and resources
Strong assumptions
Which one worked?
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Neither.
“Each functioned in practice as a
mixed economic system. There are
planning and socialistic aspects to all
economies that regard themselves as
primarily capitalist. Similarly, there are
market and private capitalist aspects of
socialist planned systems”(77).
The Concept of Market
Socialism
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Introduce market pricing into a socialist economy
The difference from Central Planning is that the
board does not fix prices, they respect market
solutions
The Board should:
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Change prices (not fix prices) until markets are cleared
Allow consumer choice
And require cost-effective operation producers
Some Economists argued that market based
socialism would be hard to implement. They did not
want to modernize or liberalize socialism.
(Macroeconomic) Stability Criteria
for Transitioning
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Keeping inflation in restraint (under 10%)
Maintaining a high level of employment
Maintaining strong output growth
Keeping the income/wealth distributions
equitable
Providing basic social services
Building up the country’s infrastructure
Keeping the balance of intl. Payments near
equilibrium
Keeping the internal fiscal balance near zero
Keeping money supply on moderate growth path
Transitioning Procedures
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The target has been one of a mixed
economy of market socialism
Increase trade and technology
Creation of special economic zones
Introduction of modern economic
education
The absorption of quantitative methods
from econometrics and statistics in prep
for application to economic planning
Lessons from Korea
Irma Adelman
Korea’s Economic
Development
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Two five year plans implemented by
President Park
First Plan: focused on infrastructure
development and import substitution
Second Plan: emphasized exportoriented industrialization
First Five Year Plan (1962-66)
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Strategy: increase employment by
applying labor-intensive methods to
construct new infrastructure (roads,
dams, irrigation, etc.)
Import substitution: this increases
employment and improves the balance
of payments. This also reduced the
inflow of foreign goods.
Results
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The fast growing industry generated inflation which
averaged 16 percent and exceeded 20 percent in
two out of five years.
“Between 1960 and 1981, Korea had the highest
inflation rate among the Asian newly industrializing
countries”(Song 1996). Byung-Nak Song is a
Korean economist who wrote a book called The
Rise of the Korean Economy. She provides great
information on Korea’s economic and industrial
growth.
The overall strategy was successful for growth and
social development but it did not compete with the
world market.
Second Five Year Plan (1967-72)
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Emphasis shifted from imports to exports
Strategy: ranged from nondiscretionary
market-oriented measures to presidential
pressure on individual firms
Firms that exceeded their quotas were
rewarded by subsidized credit and import
licenses. Those that fell short were liable to
lose their foreign trade licenses and
sometimes were tax audited or their utilities
were shut off.
Results
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The economy grew very fast
Employment rose by 25% and
unemployment was cut in half.
The distribution of income became
more level.
School enrollments increased by 28%
Infant mortality dropped by 30%
Life expectancy rose by five years
Economic Troubles
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Mismanaged financial liberalization led to
severe economic troubles
Between 1995-1997 international claims on
banks had risen by 30 percent.
Korea experienced a huge swing in foreign
capital flow. “There was a $20 billion outflow
during 1997, compared with a $100 billion
inflow the previous year”(129).
This results in a recession
Lessons for Russia
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“With leadership committed to development,
it is possible to turn a corrupt soft state into
a hard, developmental state. [South Korea’s
economy started as] a sinkhole for foreign
assistance. It was only with the birth of the
strong developmental state and the
adoption of a coherent development
program that the Korean economic miracle
was born”(131).