Economics of Transition Barry W. Ickes Spring 2007

What is Transition Transition is development economics from different initial conditions –Developing economies start poor –Transition economies were poor countries that adopted strange institutions to develop –The key question of transition economics is how to get back to the normal road of economic development Without having to double back

Founding Fathers

Magnitogorsk

Chelyabinsk Tractor Factory

Norilsk

Gdansk Shipyards

Antonov

Berlin Wall

Transition

Transition Figures

Comparative Economics vs Economics of Transition The study of comparative economic systems was much like economic pathology. –We studied how economic systems that were "sick" operated. –What happens to the economic system when its nervous system is seriously distorted? Economics of Transition is then the study of therapy: ∙ –How does an economic system suffering from such pathology recover? –It is the study of restoring the health of an economic system.

Evolution and Transition Compelling issue of transition economics is that simply removing distortions and impediments to markets does not accomplish the task of economic renewal. –Institutional change is complex and painful Development is the process of turning a less complex organism into a more complex onecomplex one Transition is very different. –It can be likened to changing the organism from one type to another Transition economies differ in terms of how long they spent on the “wrong” path

Human EvolutionEvolution

Economic Evolution

The main ingredients of the transition process Liberalization Macroeconomic stabilization Restructuring and privatization Legal and institutional reforms But what order and what to emphasize first?

Some Transition Puzzles The Output Fall –The Uzbek Growth Puzzle Returns to human capital Re-demonetization Value destroying activities are retained –Difficulty of eliminating soft-budget constraints Geography matters –The Great Divide Privatization and efficiency

Transition Questions 1.Do differences in transition outcomes reflect primarily reform strategies or initial conditions? 2.Is it necessary to begin with liberalization and stabilization? 3.How crucial is privatization to marketization? 4.Does transition require that a gulf emerge between winners and losers? 5.Is there only one path that the transition can take? Or are there alternatives to the Washington consensus? 6.How long will the transition last? When is transition over?

Share of Loss-Making Industrial Enterprises in Russia, Loss-Making Industrial Enterprises

Inflation by Region

GDP in CEE’s

GDP in FSU

Depth of Transition and Distance from Brussels

Current GDP and Distance to Brussels

Evolution by Region

China and India in the Long View

Chinese Poverty