Transition of the Eastern Block From Command Economy to Free Markets

Relevance of the Transition Today 1990’s- present: Transition in Eastern Europe 2004 – admission of several Eastern European states into the EU 2007 – introduction of the Euro in one of the former Soviet states Lessons on institutional development from the transitional economies China today and its transition to a market economy Transition today in Vietnam Remaining command economies: Cuba and North Korea

Brief History of the Soviet Block Pre 1913 Russian Empire –Agricultural orientation of the economy WWII and the impact on economic stability The Russian Revolutions of 1917 –February –October The Civil War and the birth of the USSR New Economic Program ( ) Industrialization emphasis begins Emergence of Coba Agricultural Reform –Collectivization and its process –Later establishment of Sovhozes

1939 – First major Expansion of the Block in Europe –Division of Europe between Germany and the USSR : The Great Patriotic War –Expansion of Siberian Industrial base 1945: Next phase in the expansion of the Block in Europe ’s the recovery years

Period Growth in Combined Factor Inputs Growth in Total Factor Productivity CIA estimates on Growth in TFP Performance of the Soviet Economy Source: G. Ofer, “Soviet Economic Growth”, Journal of Economic Literature

PeriodGNP GrowthGNP per capita Growth Growth in the Soviet Economy Source: G. Ofer, “Soviet Economic Growth”, Journal of Economic Literature

Brief History of the Soviet Block Russia –1917 The two Russian Revolutions – The Russian Civil War –1922 Birth of the USSR – NEP –1924 Death of Lenin, Stalin’s era begins – ’s Industrialization Program –1939 Expansion of the Block Latvia, Lithuania, Estonia, parts of Poland, Romania – The Great Patriotic War Rapid growth of Siberian heavy industry bases –1945 Further Expansion of the Block Poland, Czechoslovakia, Hungary, Romania, Bulgaria, Yugoslavia, Albania

Command Economy Central Planning –Structure of the system –Fixed prices –Guaranteed/mandatory employment Simplification of industry structure –Merger of enterprises and establishment of large enterprises Competitive pressures –Lack of competition domestically Collective farms (Kolhoz), versus state farms (Sovhoz) “13 th month salary” –International competition

The Slowdown 1953 – Death of Stalin Khruschev’s Era Breznev’s Era Between Breznev and Gorbachev

The era of reforms begins 1985 Gorbachev comes to power the start of economic reforms in the USSR Fall of 1989 the Block starts to collapse in Eastern Europe Commonwealth of Independent States (CIS), community of independent nations established by a treaty signed at Minsk, Belarus, on Dec. 8, 1991, by the heads of state of Russia, Belarus, and Ukraine. January 1, 1992 – the USSR is dissolved; Reforms begin in the newly independent Russia and all the other republics In 1993, the CIS expands to include all of the former Soviet Republics except the Baltic States. List of members includes: –Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Uzbekistan and the original three members

Characteristics of Transition Political –From one party system to democracy Institutional –Establishment of business education –Business laws and property rights –Tax system Economic –Privatization –Price liberalization –Tax collections –Open economy issues Investment Exchange rate regime Commerce with former republics Command economy 1.Public ownership of means of production 2.“the state acts as one gigantic firm” 3.State set prices 4.State distribution of wealth 5.Central Planning 6.Principal – Agent Problem Market Economy 1.Private enterprises 2.Price flexibility and Price signals 3.Market friendly institutional support

Reforms in Transitional Economies planning is great if you have the opportunity to do it Privatization What’s the value of state enterprises? How should the shares of those enterprises be allocated? –Poland (intermediate funds), Czech Republic (vouchers), Yugoslavia (worker-control), Russia (combination of vouchers, management control…) –Effect of the scheme on the scope of restructuring - income distribution - government budget - differences between the economies of the USSR and those of Eastern Europe Price liberalization Shock therapy versus gradual approach - Poland (January 1, 1990) versus Hungary and the experience of Russia Sequence of reforms (political and economic) and income inequality Financial Stability and exchange rate

Economies in Transition: Real GDP growth rates

Pain of Transition Population comparison Standard of living comparison

Today Eastern Europe and the European Union Strong growth in Russia, and the world markets of oil and natural gas Recent political changes in Ukraine, Georgia Political problems in Uzbekistan, Belarus