Transcript Economic transition

 Charles van Marrewijk
Transition; 1
none
State ownership
total
The economic transition of formally centrally planned economies has
many aspects
Let’s look at
just 2
dimensions:
market
intervention
and state
ownership.
none
Market intervention
total
Different
economic
systems can
then be
characterized
in this matrix
 Charles van Marrewijk
Transition; 2
total
At one hypothetical extreme we have capitalism, without state
ownership or
communism market
intervention
none
State ownership
At the other
extreme
communism
with total
state
ownership
and total
government
control.
capitalism
none
Market intervention
total
 Charles van Marrewijk
Transition; 3
none
State ownership
total
No country in the world fits in either extreme description.
Even the
USA has a
communism
public sector
N. Korea
spending
Cuba
30% of GDP
Even North
Korea and
Cuba have
private
production
and
USA
incentives.
capitalism
none
Market intervention
total
 Charles van Marrewijk
Transition; 4
none
State ownership
total
Note that other hypothetical extremes are also possible. A country in
transition is
Market
changing the
communism
socialism?
mix of state
N. Korea
ownership
Cuba
and market
intervention
in the
medium run.
From the
same initial
position
USA
Welfare state many
capitalism
different
capitalism
paths are
none
Market intervention
total possible.
 Charles van Marrewijk
Transition; 5
none
privatisation
State ownership
total
Note also that privatisation is one-dimensional, while transition has
more
Market
dimensions.
communism
socialism?
If we would
N. Korea
place
Cuba
Holland in
this figure
Holland
Holland
Holland
and
Holland
Holland
characterize
Holland
its path over
the last 15
years it
USA
Welfare state would look
capitalism
somewhat
capitalism
like this
none
Market intervention
total
 Charles van Marrewijk
Transition, a second “J-curve”; 6
The multidimensional character of transition, the differences in initial
positions, the differences in transition mix and speed of privatization
and deregulation make it easy to understand why different countries
have widely varying transition experiences.
Transition involves a series of steps at the institutional, microeconomic and macroeconomic level. Inevitably, adjustment requires
a reallocation of capital, services and labor between sectors of the
economy, leading to an initial phase of decline in production.
There are two strategies of reform:
•the “big bang” approach, achieving necessary steps of transition in
a short period of time, leading to large initial declines of production
(Poland is the prime example)
•the “gradual” approach, trying to systematically sequence the steps
to be taken and minimize transition pain and output loss (successor
states of the former Soviet Union).
 Charles van Marrewijk
Transition, a second “J-curve”; 7
140
120
100
Slovak Rep.
80
60
Ukraine
40
1989 1990 1991 1992 1993 1994 1995 1996
Poland,
following the
Poland
“big bang”
strategy, suffered
the most serious
Hungary
decline in
production in
1990 and 1991.
Since then,
however, the big
Russia
bang strategy
seems to have
worked much
1997 1998 1999 better than the
gradual
approach.
 Charles van Marrewijk
market goods
Transition, the costs; 8
The transition process is estimated to lead to huge costs. Let’s look
At these costs using a
neoclassical framework
and our knowledge of the
construction of statistics.
We draw a ppf for a
transition country.
On the axes we put
“market goods”
versus “planned
good”.
The economy
produces a lot of
P0
planned goods at P0
planned goods
 Charles van Marrewijk
market goods
Transition, the costs; 9
If the transition process is complete the economy will produce a new
output mix, such as P2.
The transition process
brings the economy from
production point P0 to P2.
How long it takes,
P2
and how it evolves
we cannot say; here
we have drawn a
possibility.
Production point
P1
P1 is reached
P0 after some time.
planned goods
 Charles van Marrewijk
Transition, the costs; 10
market goods
How do we measure the loss in output resulting from the transition?
Statisticians use the prices
at P0 to estimate the fall in
production.
Clearly, the estimated
production loss at P1
P2
compared to P0 is
substantial.
P1
P0
planned goods
 Charles van Marrewijk
Transition, the costs; 11
market goods
Remember that the initial production point P0 was not optimal.
After the transition
process is complete
the production point
P2 should represent
true preferences.
P2
Using P2 prices there
is no production loss
at P1 relative to P0.
Using preferences
there is actually a
P1
welfare gain.
P0 The estimated loss
is exaggerated.
planned goods