Eastern Europe and the Former Soviet Union Class 2: The Transition Period

Begins January 1, 1989 Poland launches big bang stabilization program had been earlier attempts at reform but...

Dimensions of transformation under way q From planned to market economies q Integration into global economy q Political territorial fragmentation

Major issue re. market economy often ignored q What kind of a market economy are these countries aiming for??? q Liberal market economy (U.S. model) q Welfare state (Western European model)

Primary components of transition to a market economy q Privatization q change in ownership structure q Marketization q substitution of the price mechanism to bring supply and demand into balance and to allocate factors of production

Integration into global economy q Necessary to adjust internal prices and output structure to world market conditions q Problem q How to expand exports???

Additional issue--social safety net problem q Old system relied on full employment labor market and distribution of benefits by enterprises q unemployment increases in transition and enterprises cannot act as benefactors and still compete q state lacks the funds to increase social welfare spending

Growth, Inflation and Fiscal Balance in Calendar Time: All Transition Economies

What is responsible for the slump in output??? Collapse of CMEA trade Substantial industrial output became uneconomic under the new market prices Tighter credit restrictions needed to control inflation made it difficult for even viable enterprises to get access to credit

Reservations

1. Growth, Inflation and Fiscal Balance in Stabilization Time

Inflation-Growth correlation, average of

Padma Desai’s perspective High vs. medium and low-speed reformers High Speed reformers got an early start and adopted more comprehensive reform –price decontrol –fiscal and monetary tightening to reduce inflation –convertibility of currency –trade liberalization –privatization

Findings

BUT

Implications??? One perspective. Not a significant problem. Faster growth will eventually provide more employment Alternative perspective. The high unemployment rate may make it impossible, politically, to sustain an economic reform package before this can happen

2.Data problems q Prices at which goods were valued before transition were significantly out of line q quality of goods was typically very poor q Need to build new statistical services. q Earlier systems set up to measure state sector output q increasing share of output is not recorded (unofficial economy) q incentives

How to estimate the size of the unofficial economy??? q A macroelectric approach q based on observed correlations between GDP and total electrical use. q use trends in total electrical consumption as a proxy for trends in the overall economy q subtract est. of change in official economy to estimate unofficial economy

The example of Ukraine

Results for the region

Recent Trends--variability (World Bank web site) q Poland q by 1994 real GDP exceeds 1989 q GDP growth rate is 6.2%/year q Hungary q % % q Czech. Rep. q 19943%1995 6% q % %

q Latvia q % % q Russia % q Ukraine % q (ripple effect from Russia) q Kazakhstansame problem. Financial crisis--> fall in commodity prices-->falling GDP in 1998.