Transcript Taylor_micro_ch19 - pm

Chapter
Nineteen
Transition
Economies
Transition Economies
• Command Economy (or Centrally Planned
Economy) – an economy where the government
sets prices and decides what, how and for whom
goods will be produced.
• Market Economies - an economy where the
individual buyers and sellers set prices and
decide what, how and for whom goods will be
produced.
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Centrally Planned Economies
• Socialism – an economic system in which
the government owns and controls all the
capital and makes decisions about prices
and quantities as part of a central plan.
• Capitalism – an economic system based
on a market economy in which capital is
individually owned, and production and
employment decisions are decentralized.
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Centrally Planned Economies (cont’d)
• Communism – an economic system in
which all capital is collectively owned.
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Central Planning in the Soviet Union
• Nationalization – the taking over of private
firms by the government. For example,
Vladimir Lenin and the Bolsheviks party
(the Communist party) nationalized the
banking industry and other large and small
scale industries after the October
Revolution of 1917.
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Central Planning in the Soviet Union
(cont’d)
• When Joseph Stalin took over as the
leader of the Communist Party, private
property was abolished and production
was assigned to state enterprises and
collectivized farms.
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Central Planning in the Soviet Union
(cont’d)
• Collectivized Farms – a farm in a planned
economy that is in theory collectively
owned by peasants, but is controlled by
the government.
• State Enterprise – an organization,
analogous to a firm in a market economy,
that is owned and controlled by the
government.
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Central Planning in the Soviet Union
(cont’d)
• Central planning required that prices and
quantities of goods be set by the
government (Gosplan).
• Production Target – a goal set for the
production of a good or a service in a
planned economy. Gosplan tried to
control how much was produced at each
state enterprise and collectivized farm.
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Central Planning in the Soviet Union
(cont’d)
• Centrally Controlled Prices: Gosplan tried to set
the prices of the goods and services. However,
these prices were nowhere near the equilibrium
price in a market, so shortages were typical.
Black markets emerged.
• Black Markets – markets that operated outside
of the normal central planning procedures.
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From Perestroika to the End of the
Soviet Union
• Perestroika – the restructuring of the
Soviet economy by reforming the central
planning process.
• While Perestroika changes put into place
in 1985 did not help the Soviet Union’s
economic growth, the gradual changes did
result in the collapse of the Soviet Union in
1991.
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From Perestroika to the End of the
Soviet Union (cont’d)
Timeline:
• 1985 – Mikhail Gorbachev becomes leader of
the Communist Party and introduces
“Perestroika” changes to its five year plan.
• 1990 – Lithuania declares independence from
the Soviet Union. Estonia and Latvia follow.
• 1991 – Gorbachev resigns and the Soviet Union
ceases to exist. Boris Yeltsin, the president of
Russia, abandons central planning.
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Soviet-Style Central Planning in China
• Mao Zedong, the leader of the Communist Party
in China, implemented Soviet-style central
planning in China.
• “Great Leap Forward” – an economic program
implemented by Mao which briefly raised
economic growth by promoting a warlike work
effort throughout the country, and called for
massive expansion. This program failed to
promote sustained growth and resulted in
declined production.
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Soviet-Style Central Planning in China
(cont’d)
• Economic reforms (toward a market
economy) began in the agriculture sector
in the late 1970s. After 1978, the growth
rate of agricultural production was about 6
percent per year. The increased efficiency
of agricultural workers resulted in an
increase in the supply of workers that
moved into the industrial sector.
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Soviet-Style Central Planning in China
(cont’d)
• By the mid 1980s (around the time of
Perestroika), economic reforms spread
beyond agriculture. Individual stateowned enterprises were given discretion to
produce new products and were allowed
to keep some of the profit.
• Economic growth averaged 9.6 percent
from 1987-1994.
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Economic Transition:
Elements of Reform
•
How does a country change from central planning to a
market economy?
•
Requirements for a successful transition include:
1) A legal system specifying property rights with ways
to enforce the law must be set up.
2) A system of tax collection must be put in place.
3) The government must stop controlling prices.
4) The government must enforce competition among
firms.
5) The government must substantially reduce the
budget deficit, if present.
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Economic Transition:
Elements of Reform (cont’d)
• How fast should the transition be? Two basic
alternative theories on the speed of transition:
Shock Therapy vs. Gradualism.
• Shock Therapy – the abrupt introduction of free
markets in a formerly centrally planned
economy; also known as the big bang approach.
• Gradualism – the slow phasing in of free market
reforms. Requires that the elements of reform
be placed slowly and not all at the same time.
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Economic Transition:
Elements of Reform (cont’d)
Arguments for Shock Therapy:
1) Positive attitudes regarding reform are
temporary, creating a brief window of
opportunity for reform.
2) All elements of reform are interrelated, making
it difficult to implement one without the other.
For example, eliminating state enterprises
without fostering competition could result in
monopolies.
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Economic Transition:
Elements of Reform (cont’d)
Arguments against shock therapy:
1) People require time to adjust.
2) Shock therapy could result in large
unemployment. A more gradual
approach will allow firms to move into
other businesses and allow workers to
find other jobs.
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Economic Transition in Practice
•
Poland was the first country to undergo a
transition to a market economy using the
shock therapy approach.
Results:
1) Substantial decline in demand and shortages
began to disappear.
2) The current account balance immediately went
into a surplus.
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Economic Transition in Practice (cont’d)
More results:
3) The unemployment rate increased, but
not by much.
4) Inflation dropped from an average of 420
percent in 1989 and 1990 to 25 percent
in 1992.
5) Real GDP fell in the first 2 years of the
reform, and the economy was posting
strong growth from 1994-2001.
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Key Terms
•
•
•
•
•
•
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Socialism
Capitalism
Communism
Nationalization
Gosplan
State enterprise
Collectivized farm
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Key Terms (cont’d)
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•
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Production target
Perestroika
Shock therapy
Gradualism
Privatization
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