Transcript Route entry and exit decisions of airlines in Ukrainian market

ECONOMICS OF TRANSITION
LECTURES ON TRANSITION I
I. Reasons for collapse of CSS:
Development strategy focuses on heavy industry:
High investment rates into heavy industry =>
1) wage fund, i.e. part of output of economy going
to wages, is low;
2) industry producing consumer goods is neglected
=> shortages persistent:
Workers get low wages AND even this low
income they are unable to spend.
3) CPS => Those who are able to buy rationed
consumer goods, get shoddy goods.
=> The collapse may be explained by tremendous
incentive problem at the micro level.
II. Legacies of central planning
Some stylized facts of initial conditions of
transition economies (TE’s).
Disequilibrium at the aggregate level: supply
constrained economy, i.e. firms can sell all the
output they produce => important consequences
within firms, marketing is not a priority but has to
become one as the economy becomes demand
constrained. Incentive structure of managers has to
change.
Disequilibrium also implies monetary overhang (i.e.
stock of forced savings) => will translate into
corrective inflation when prices will be liberalized.
Some stylized facts of initial conditions
of transition economies (TE’s) cont.
Socialist economies are internationally based on
the principle of division of labour within CMEA, so
they predominantly allocate resources according to
what overall plan says, they DO NOT allocate
resources in an efficient way at all if we think
about relative world prices => opening these
economies to world markets (trade liberalization,
i.e. slashing of tariffs) will make a lot of these
firms unviable unless they rapidly restructure, i.e.
use resources in a way that reflects relative prices
rationally (energy is a particularly good example).
Also => to ensure a rational use of resources one
needs to open up these economies.
Some stylized facts of initial conditions
of transition economies (TE’s) cont.
Government budget:
Tax revenues: based predominantly on turnover tax
of SOE firms. With the decline of revenues of SOE
firms after transition, tax revenues fall.
Expenditure side: lots of non-targeted subsidies, with
rise in open unemployment and bridging schemes
expenditures could/did rise, so government deficits
are pre-programmed once transition starts.
Some stylized facts of initial conditions
of transition economies (TE’s) cont.
No banking sector. It needs to be developed =>
At the macro level this means that initially
government can only monetize deficits, it
cannot raise internal financing (with foreign debt
high
external
borrowing
is
also
difficult/impossible).
At the micro level, there is (certainly in the early
stages of transition) no mechanisms to allocate
external funds to investment projects by
firms => lack or embryonic nature of banking
sector retards growth and job creation.
Some stylized facts of initial conditions
of transition economies (TE’s) cont.
CPS has a very different “social security” system from a
Western economy. Virtually no unemployment (better, no
OPEN unemployment) exists. Apart from pensions, all other
benefits that workers have are given to them by firms (typically
life-long job at one firm with all benefits provided from firms “social assets”).
In a western economy, firms are in the business (roughly speaking) to
make profits; they don’t provide predominantly benefits to workers
(although there are some elements of this in western firm – worker
relationships).
In the west, labour markets are relatively efficient (in the sense that
they remunerate skills in demand with relatively higher wages and in
the sense that they in equilibrium over the medium to long run, i.e.
skills demanded ≈ skills supplied). The state provides a safety net for
those workers who are permanently or temporarily at a disadvantage
in the labour market.
Some stylized facts of initial conditions
of transition economies (TE’s) cont.
=> Social safety nets have to be built up once transition
starts to effectively and in a targeted way alleviate poverty
and help temporarily non-employed, where both poverty
and non-employment are, at least in part, brought on by
reform.
No open unemployment before => labour offices
(“employment service” in Russia) that previously helped
firms to find workers (under CPS excess demand for
workers exists) now have to do several tasks:
a.administer Unemployment Benefits (UB);
b.
help workers find work (“job brokerage”) and
c.administer ALMP (active labour market policies).
A huge achievement is that TE’s in Central Europe have very
Some stylized facts of initial conditions
of transition economies (TE’s) cont.
Sectoral distribution of employment is
skewed towards industry and strongly against
services (the consequence of development
strategy that emphasizes industry, in particular
heavy industry and sees consumption as a
residual).
Also size distribution of firms is skewed towards
large (very large) firms that are often vertically
integrated. In the West small and medium firms
are often responsible for most new job creation.
Some stylized facts of initial conditions
of transition economies (TE’s) cont.
Most of physical capital in the economy is owned by
the state => privatization of virtually the entire
stock is required.
This is not easy for many reasons. Among them are:
- Sheer size of the task;
- Valuation problems (issue of sequencing)
- Privatization schemes and corporate governance
issues:
- Selling vs give aways (corrective inflation has
wiped out savings, so selling the stock
domestically is difficult. To foreigners ideologically impossible (the main exception –
Hungary)).
Some stylized facts of initial conditions
of transition economies (TE’s) cont.
Question: why is it necessary to privatize?
Empirically - in western countries private firms in
general are more efficient than firms run by the state.
Theoretically – if there is a private claimant of the
residual, i.e. π, of a firm’s activity, this claimant makes
sure that resources are used in the most efficient
possible way, i.e. that π is maximized.
In the west a claimant of the residual can be:
- a manager – owner
- share owners in the equity market (Anglo-Saxon model)
- banks as majority holders of a firm’s equity (German
model)
Whichever way, we have efficient corporate
Some stylized facts of initial conditions
of transition economies (TE’s) cont.
Political economy viewpoint.
Privatization is also an irreversibility
issue; fast privatization ensures that it
will be virtually impossible to go back
to the old economic regime.
Some stylized facts of initial conditions
of transition economies (TE’s) cont.
 Most countries have high foreign debt
(government
and
private
western
creditors) => IMF, WB have leverage in
pushing for reforms.
Most countries have little FDI in the
early stages of transition (the only
exception is Hungary that had already
opened up before 1989) => little foreign
capital helping in restructuring.
Some stylized facts of initial conditions
of transition economies (TE’s) cont.
Last but not least.
Soft budget constraint is pervasive
throughout
CPS
=>
generates
management behaviour that does not
economize
with
resources
=>
imposition
of
hard
budget
constraint seems to be one of the
most
pressing
problems
of
reformers.

III. Introduction to Transition

t
Taxonomy of economic reform I
Price liberalization
Trade liberalization
Macro stabilization
Privatization
Social safety net and income support for unemployed
Tax reform
Creating a banking system
Systemic reforms:
Reforming the labour market
Generating a business friendly environment that also
encourages competition
Generating a commercial law structure
Define BB (Poland) vs Gradualism (Hungary) using taxonomy I
Taxonomy of economic reform II
1. Consistent reformers.
2. Inconsistent but substantial reformers.
3. Laggards (countries that lag behind).
Ad. 1 CR, Hungary, Poland
Main Reasons:
 Collective memory of “bourgeois”, precommunist times unlike in CIS.
 Own government for the first time in 50
years, initially given a blank cheque by
population (Balzerowich can pursue his
reform policies for years). CPS governments
are perceived as satellite governments
imposed by Moscow.
 Top bureaucracy is united in reform stance
 EU accession requires reform.
Ad. 2 Russia
Gaidar and his “window of opportunity” slashing
expenditures on military-industrial complex. Main
problems with consistent reforms:
 Reformers surrounded within bureaucracy by enemies of
reform; also no attempt whatsoever to sell reform to the
public; BB approach trying to move on several fronts at
might also have been ill-conceived given the lack of
support: it might have been better to move on one front
only and then having some success getting support for
further reforms.
 No collective memory of capitalist/market based economy
(socialism more than 70 years)
 Soviet government “own government” for a large part of
population (certainly in Russia)
=> new governments don’t get a blank cheque like in
Poland, CR etc.
Ad. 3 Ukraine as a laggard
After independence, Aug 1991, several years no
reforms whatsoever. Reasons:
 “Moscow” syndrome: no one gives
anymore from Moscow.
 Western Ukraine (mainly Ukrainian) is
confronted with Eastern Ukraine (mainly
Russian)
 these factions block each other
order
One piece of evidence w/r to
taxonomy II
(NB: the large positive growth rates in Russia and Ukraine
since 1999 are not taken into consideration in the
graphs)
GDP
(indexed
to 100 at 100
the
beginning
of
reform)
0
1)
“U – shaped” output
curve
Time (0 – start of
t reforms)
One piece of evidence w/r to
taxonomy II cont.
2), 3)
GDP
100
2
3
t
General implication for poverty:
Increase in poverty is much stronger and
more persistent in CIS (starting at any rate
from a much lower per capita income than
Visegrad countries) than in CE. Poverty in CE
like in the West affects above all the
unemployed, in CIS most employed workers
are impoverished after the collapse of the old
system.
=> Reform is harder to pursue in CIS than
in CE as benefits of reforms are not clear