m
m m

   
 

SOCIALISM
„ Socialism was based on a one ² party state, with
the structure of the party being hierarchical.
„ 
 |

Collective ownership of the means of production
„ Consumer products were seldom collectivised.

Centrally Planned
„ a, 1 year plans, set by politicians.
„ Set by matching units of resources to potential uses of such

resources.
„ Problem| !"#!
$%"!&'
(&&)
SOCIALISM
„ 
*+ ""|

„ Vhe theory of reproduction as a voluntarist rule|

Marx postulated that in a modern Industrial economy, the public good
sector would outgrow the consumer good sector, leading to crises of
overproduction.

In a socialist economy, however, this would not occur a
#&"$&&
)

Vhus, one has to invest more in the former sector from the outset in
order to meet the rising needs (latter sector) later on.
„ Industrialisation + Extensive Growth|

Vhe above suggests that "! 
 
  ".

Vhis was backed by a process of ruthless industrialisation and capital
accumulation, which ² according to the solow model ² would lead to
higher growth.

Priorities retained some element of a #,#-
from the war.
SOCIALISM
„ Vhe Socialist System had fundamental economic flaws|

 ."that lead to drastic shortages.

Hidden Unemployment.

Hidden/Repressed Inflation.

 "$Õ
  Õ
 
 

&& &, which diminished the
rate of return for investment.

Prices conveyed no real information.

Objective of firms NOV to profit max, but to meet VARGEVS (giant
nail).
„ Vherefore, the system was unwilling and unable to react to excess demand.

m/+
+
m .
„ What Vech progress there was years behind and imitative of the West.
„ Y = A(L,K), A = V P; is a big driver of growth.
„ Central Planning was also at fault|

Highly rigid, due to time it took to
redraft a ¶plan·.

# !!was dominant.
„ Roland (1994)| ´Socialism is a system of low incentives and high insuranceµ

Information was imperfect.

&" 0² a retrospective system.
SOCIALISM
„ Vhe Symptoms observed as a result of the
fundamental flaws in the system|

"+; even by the exaggerated ¶official·
figures.

1)

" and largely imitative of
the West outside of military purposes.

&&.

"" and self sufficiency
could not be achieved (In part due to Stalin·s terror and
coerced movement from farms to industry).

 !".
„ However, the economic flaws themselves became
apparent relatively early on. What kept the system
going was political inertia.
„ Vhis was challenged by Glasnost and Perestroika.
SOCIALISM
„ Glasnost + Perestroika were introduced by Gorbachev as an
attempt to reform the stagnating socialist system.
„ (%234a'

inal attempt at # #in the USSR.

Enterprises to get more rights; ¶Individual Activities· - a limited
substitute for private enterprise; leasing contracts for agriculture
(designed to entice new entrants).

However, it was and not credible ² fears that it would be rolled back
meant new farmers did not enter.

Despite it·s weakness, it still destabilised the sclerotic existing system
and precluded the 1989 open crisis|
„ Inflationary pressures mounted, despite fixed prices.
„ Vhere was a great deal of overhang Vhe discrepancy between effective
demand and supply at fixed prices.
„ Rationing was being introduced in the big cities.
„ +%234a'

Can be interpreted as| ¶# $#
&·.

Was a Ô
, not economic reform Vhe impact on workers was that
MPL fell further as workers spent time watching V
and reading
newspapers.

Glasnost precluded the reform process in CEE due to a weaker
Kremlin.
VRANSIVION
„ Vhe collapse of  m#%m'
in 1991 was the first, essential step of transition.
„ However, whilst the institutions of the CMEA were easy to dissolve,
## & 
( "#&-"  &

&(a non-transferrable currency).
„ 5
 +#·
„ With the shift to ¶hard currency and open trade, it was expected that
price ratios would converge on World ratios, and that Russia would
become a net creditor.
„ Based on two assumptions|

i| New system of prices + Settlements would work

Ii| Vhat the commodity composition of trade would remain constant.
„ However$#as historically trades
were made in kind, primary commodities had a low PeD and supply
was undergoing structural change. Vhe USSR also hoarded hard
currency from it·s exports and was ¶unable· to pay for it·s imports.
„ !$.
VRANSIVION
„ Vhe typical stabilisation package administered by the IM was
modelled on the ¶º"· and was administered
under a rapid, ¶shock therapy· model.
„ Such a package had two elements| A package to ensure
Macroeconomic Stabilisation, and a package to ensure long term
structural stability.
„ Macroeconomic Stabilisation|

I á &
„ Reduction of subsidies, Liberalisation of domestic trade.

II ² ."+!)."
„ Raise taxes, reduce Government Spending.

III ²
!
„ Keep interest rates high

I
² #
„ Prevent ¶Inflation-wage spiral·


² "&
„ Lifting of protectionist policies
„ Structural Policies|

I ² !, dismantling monopolies, flexible labour market.

II ²
 #to encourage market environment.

III ²
#!5 #"!* , implement a lighter
welfare state and prepare for austerity measures.

I
²  to identify ¶winners· and ¶losers· to aid
restructuring programmes.
VRANSIVION
„ Vactical Choices of Vransition were twofold| One
about the correct sequence of reforms and one about
the speed of reform.
„ Sequencing debates were concerned with three issues|

&
„ ears about !""-,
#" ".
„ However, !"& 0(
-, and #!!,"
behaviour rather than profit-maxing behaviour.

"&
„ ears that #-could exaggerate
price shocks and be harmful.
„ Proponents argued that competition would prevent price hikes
and a &#.


 #
„ Stabilisation requires a 2 tier banking system, hence these
reforms must preclude a successful monetary + fiscal
stabilisation.
VRANSIVION
„ 
 %."."6+#'
„ Shock Vherapy|

 #((, and some reforms are
complementary as discussed in the sequencing debate.

However, the main reason for Shock therapy was political| &("
!" 5 *& 
#(($+!#&##
  #.

HAS to be carried out with a strong political will ² Russia is an
example of (
  creation of Oligarchs.
„ Gradualism|

All the countries in Vransition went for a shock therapy approach, but
a gradualist approach can be seen in China.

Vhe Gradualist argument (which is now widely recognised as the
¶correct· transitional strategy) argues that shock therapy
underestimates the importance of|
„ #  #
„ # "
„ ""7 #(

In addition, Capitalism is ¶organic· and evolves naturally, so thrusting
it upon a country is dubious.
VRANSIVION
„ Both debates have run their course|

Vhe debate about sequencing changed into a debate
about the credibility of measures, as opposed to their
sequence

Vhe debate about speed became redundant when it
was realised that &&
##$
"#")
„ Overall, the stabilisation packages administered
in CEE were fairly homogenous, although their
impact was less so.
„ Vhe outcome of the stabilisation measures can be
observed in the Monetary ² inancial field and
the ¶Real· field.
VRANSIVION
„ á  

„ I ² IN LAVION

Vwo Phases|

2, %-'"|
„ Surge in prices from Overhang, market clearing prices higher than
previous artificial market, fragmented local markets, firms unsure how
to operate a profit-max firm.
„ Drove many economies into  .
„ Price rises not evenly distributed ² food had fast and sharp, services
took longer to subside.

8, &" |
„ Inflation is difficult to cut down due to problems with the MONEY
SUPPLY (money supply needed to liquidate the capital market)
DEMAND SIDE (excessive wages) and SUPPLY SIDE (rise in energy
prices)
„ II ² BUDGEVARY BALANCE

Increasing deficits were observed because the drop in output
meant revenues fell whilst expenditure needs rose; there was
little scope for cuts and tax evasion was rife.

Policy makers were faced with either building credibility with
the IM or staying in power domestically.
VRANSIVION
„ á m- &

„ Vhe trend has been for an immediate improvement (1990 ² ·92)

accounted for by a strong devaluation and reorientation of trade flows
to the west. However, there was then a worsening, due to|

m-""#

„ Different countries used different types of exchange rate regime, from fixed to
floating
„ #!#"!, therefore only a few
countries went for a fixed regime; the IM did not object, even though it is,
technically, in favour of flexible rates.


 -#
„ Initial exports from CEE were ¶firesales·; as export composition has changed, the
initial surpluses have begun to turn into deficits (with Russia being an exception).

" &
„ Debt is constrained by the IM , who had to approve any foreign aid.
„ Countries initially had HIGH capital inflows. Vhis was problematic because "
    " " )
„ Large inflows in Czechoslovakia became a normal way of financing the current
account deficit ² this lead to a 2339)
„ In sum, the :"
"$#%#!
 $! -&
&233;,38).
„ Vhe ¶REAL· indicators were much worse.
VRANSIVION
„ #  &
m#

„ OUVPUV

Output (GDP) fell in all transition economies until 1993/4
when CEE began to recover. Vhe fall was much worse than
expected.

Why? Vwo main schools of thought|
„ %""'² the soviet system was
overproducing, and that wasteful production had to stop; indicators
were flawed and overestimated the ex-ante output.
„ #% $ '² Stabilisation
policies should have had a deflationary effect, but the credit crunch and
initial devaluations exacerbated things. Blanchard notes that
organisational and information links were disrupted without
replacement; there are numerous MICRO PROBLEMS.
„ UNEMPLOYMENV

Wasn·t as high as it should have been.

Vhis was because of inadequate infrastructure to absorb the
unemployed, and firms did not cut costs by laying off workers
due to an ingrained culture of hoarding workers.

Unemployment stabilised at about the 10 ² 18% level in CEE.
VRANSIVION - CONCLUSION
„ Vransition had both successes and failures; the
successes managed to get back to pre ² transition
levels of output by around 1997, and were largely the
PHARE countries (Hungary and Poland).
„ Vhe losers, at that point in time (including Russia and
Georgia) were still tackling hyperinflation and/or low
GDP rates.
„ Kornai considers CEE a SUCCESS story due to speed
and completeness of change, however.
„ 0

CREDIBLE COMMIVMENV VO RE ORM.

E ICIENV INANCIAL SECVOR.

RULE O LAW.

AD-HOC MEASURES.

LUCK.
 VRANSIVION - APPENDIX
M