Transcript Lecture 14

Output Patterns in Transition Economies
1 Introduction
• The initial drop in output is a stylized fact of transition:
– Poland-15%, Hungary 18%, Czech-21%, Russia-40%
2. Patterns of Transition
• A transition-related recession is a common feature:
– Growth has resumed in most countries, but only in Central Europe has the
recession been overcome in levels
– Central European Economies have generally done better than FSU
economies. Only in CEE has growth restored official GDP to its initial
level
– Among the rest of the FSU Uzbekistan and Belarus appear to be doing
the best
– Within CEE Bulgaria and Romania are the worst performers. Poland and
Slovenia are the largest successes.
– It appears that the shorter the faster the initial output fall the quicker the
recovery
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
3. Measurement
• Perhaps the output fall is overestimated
• There are systemic reasons why official data overstate the fall in
output, and particularly in industrial output, in these economies.
– the statistical systems of socialist economies were census-based, and were
designed to gather data from the state-owned sector.
– After liberalization the most dynamic sectors of the economy are services and
new private enterprises, and these types of establishments are hard for the
authorities to keep track of.
– The incentives to report output have changed dramatically since the demise of
planning. Whereas enterprises formerly had incentives to overstate output to
fulfill planned targets, they are now much more interested in understating
production so as to reduce taxes.
– Growth in the relative magnitude of the hidden economy could thus explain
why the measured output drop is as large as it appears. Tax evasion is a strong
incentive to hide income, and with the very high tax rates that enterprises
faced they had a survival need to hide.
4. Factors for output decline
a) Supply shocks
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Inflationary pressures
end of subsidies
Relative price changes
Hardening budget constraints
Increased shortages due to the decline of the planning system and resulting
misallocation and distribution.
b) Demand shocks:
– Demand shocks can be thought of in terms of stabilization. How much of the output
decline is due to stabilization or transitional factors.
c) Market symbols (prices & information) were weak, thus leading to the collapse of
many industries. Directives from planners ceased but mkt price signals slow to
emerge
d) CMEA (Council for Mutual Econ Assistance) shocks—decline in trade within
the bloc.
e) Decline in investment
f) Structural adjustment
– Structural adjustment is the relative decline of the state sector and the expansion of
services and the new private sector.
g) Failure to provide needed institutional changes
- development of corporate form of business organization and bank supervision
h) Disorganization
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planners previously determined both suppliers and purchasers and, after the
collapse of planning, enterprises found themselves both w/o secure,
uncontested markets for their output. They also encountered difficulty
getting raw materials that under the former system were at least nominally
guaranteed. Transition has led to decentralized bargaining b/w suppliers and
buyers.
Blanchard, O. and M. Kremer, "Disorganization." Quarterly Journal of
Economics 112 (4) (Nov 1997)
Main idea—the collapse of planning institutions before market institutions
are in place causes the output fall. Because production involves
coordination of many different producers, the collapse of planning can lead
to inefficient declines in output. If activity could be coordinated the output
fall would not occur.
Example:
The output fall due to disorganization represents decrease in welfare
•
•
Because value adding activity do not occur. Productive activity is not taking
place because resources are diverted.
Example: inefficient bargaining-due to the absence of contracts-causes raw
materials to be exported when they could produce higher value if production
chains are maintained.
Vertical chain of production
m
↓
x1
↓
x2
↓
x3
↓
…
↓
xn-1
↓
y
m—primary input (supplier of primary good)
x1… xn-1—intermediate inputs
y—final output (producer of final output)
A good is produced according to Leontief technology in which inputs always
enter in fixed proportions to produce a unit of output (a zero elasticity of
factor substitutes) and requires n steps of production.
Assume that 1 unit of primary input leads after n steps to 1 unit of final good
(normalize the value of final good to 1). The value of the intermediate good is
0. The supplier of primary input has an alternative use, which is c (could be a
private opportunity or selling it for a less fabricated use).
Transition leads to independence of the elements in the chain. What problems
could arise?
• Bargaining
– each buyer along the chain knows only the suppliers it was paired under planning
and vise versa. The end of planning leads to n bargaining problems. Now each
unit must bargain for a supplier and a customer.
• The value of surplus in the last stage between producer final good and last
intermediate input producer is equal to 1.Therefore, the last intermediate
producer gets ½, the next to the last gets ¼, the first intermediate producer
gets (½)n. Since the 1st producer must purchase the primary input to produce,
(½)n > c for a positive surplus. Therefore, the surplus at the first stage (½)n -c >
0.
If c > (½)n the primary producer will prefer to sell to someone else. If the primary
producer defects, the output fall will be large as 1-(½)n.
The more complex the structure of production is (higher n) the smaller the private
opportunities needed to trigger the state sector.
• The collapse of output is due to a combination of 2 factors:
– The improvement in private opportunity
– Loss of centralized power of government
• The more complex is the production process, the greater output fall.
– If production is very specialized and highly disintegrated there is more opportunity for
disorganization
– Therefore more suppliers and openness of the economy would reduce the severity of this
problem
• The source of inefficiency and the collapse of output under decentralized
bargaining:
–
Each intermediate producer must produce its intermediate good before bargaining with the next
producer along the chain. Once he has produced the intermediate good and has no alternative use for it,
his reservation value is 0. The inefficiency would therefore disappear if all the producers can sign an
enforceable contract before production took place. In this case production would take place as long as
c<1. the source of the problem is incomplete contracts
• Factors to prevent output fall
– Vertical integration
•
eliminates the bargaining problem b/n enterprises. The production chain as a whole is producing value added.
– Long-term contracts
•
could prevent conflicts over splitting the surpluses.
• Disorganization had less impact on output in Central Europe, and larger
impact in the former Soviet Union.
i) The sequencing and speed of transition—fast reforms lead to sharper decline
in output but faster recovery later.
5. Labor productivity
• The initial impact of econ reform was lower labor productivity
but increases with the greater freedom of the privatized
businesses to get rid of the unproductive workers.
• The faster reforms are implemented, the more sharply labor
productivity initially declines but the more rapidly it returns to
positive. First reformers like the Czech republic, Poland and
Hungary saw productivity rising by 1992, while Russia and
Central Asian Republics continue to experience productivity
decline until at least 1996.