0. Ohio Wesleyan University
Goran Skosples
17. Transition

1. Transition
not a _______ of the existing system, but a _______________ of the current system with a new system
involves virtually all aspects of the economy: micro-, macro-economics, property rights, legal institutions, trade, social safety net, financial sector,...
vast differences among transition countries 30) –
similarities –

2. Commonalities Coordination via the _______
demand and supply not in equilibrium  ____________________
no institutions that could support the market (____________, ____________ _______________, ...)
prices did not reflect scarcities
entry into economic activity was controlled
limited private property
control of foreign trade 18

3. Dimensions of transition
Microeconomic
market creation and price liberalization
property rights
firm restructuring and privatization
Macroeconomic
stabilization
budgetary finances
financial sector reform 19

4. Output in transition countries

5. Output in transition countries
Country
Consecutive years output decline
Cumulative output decline (%)
Real GDP, 2000 (1990=100)
Hungary 4 15
109
Poland 2 6
112
Romania 3 21
144
Armenia 63 67
Georgia 5 78 29
Russian Federation 7 40 64
Output decline during the Great Depression ( )
France 11 UK US 27

6. Why did output collapse?
disintegration of the coordination structure
increase in price of __________
decrease in trade within the “Soviet bloc”
dissolution of the Council for Mutual Economic Assistance (CMEA)
new goods from the west
shadow economy
accounting errors

7. Steps of transition Stabilization severe macroeconomic problems
high inflation (hyperinflation)
monetary overhang
currency flight (usually DM and the US dollar)
inflationary tax
sharp decline in GDP
30% GDP in the US during the Great Depression
reasons already mentioned 19

9. Steps of transition Price liberalization employment
did not decrease as much as output?
instead, productivity decreased, which allowed for a ________ decrease in employment than output
Price liberalization
problematic in the SR
more beneficial in the LR
hurts less affluent more
danger that large firms will exercise their monopolistic power
could be ________ or _____________________ ___________________ 19

10. Steps of transition Enterprise reform corporatization
independent management
defined goals of the enterprise
removal of the social function from production firms
accounting reform
proper incentives
privatization  transfer or ownership
private ownership can utilize the resources more efficiently
who gets the ownership? how is this to be done? who has enough capital? what should be the value? 19

11. Privatization Desirable characteristics rapidity improved governance
fairness (equity)
further investments (capital, technology, innovation, management skills)
sustaining the overall stabilization and liberalization program
revenue for the state

12. Privatization

13. Privatization Comparison
Is privatization the same in transition economies as in established capitalist economies?
_____ privatization vs. _________ privatization
Can a product or service to be privatized be clearly identified?
Is the legal infrastructure is established? Can contracts can be written, monitored, and enforced?
Are markets and financial arrangements present? What is the value of the firm?
Can outcomes can be assessed?

14. Steps of transition Financial sector reform
monobank vs. two-tiered bank system
monobank: credit granting + plan oversight
two-tiered:
commercial banks: channeling funds from savers to investors, risk evaluation, etc.
central bank: controlling banks, the overall economy
stock markets
very _________
usually considered a consequence of development rather than a cause

15. Policy Effectiveness
How effective can a central bank be in regulating the macroeconomy?
the banking system is limited
firms do not obtain much funds from banks
____________________ are not well established
problems of policy objectives is magnified as compared to market economies (the economy is more fragile)
_______________ and _________________

16. Steps of transition International trade
previously determined by the plan, not individual firms
transition liberalized trade, but protection tariffs and licensing were put in place
currency reform  convertibility + access
realistic exchange rate
foreign direct investment (FDI)
needs clear property rights, consistent tax laws, reparation of profits
high inflow of FDI required sterilization policies

17. Steps of transition Social safety net
during socialism, non-wage benefits provided through work
unemployment hidden – actually existed, but people still employed
inevitably, unemployment increases during transition  need to create a safety net
guarantees some minimum standard of living
prevents creation of an underclass
prevents development of crime, prostitution...
helps workers find the right job match
__ levels of well being + __ inequality

18. Legal system property law contract law bankruptcy law
use of property, transfer property, right of control
contract law
clear definitions of business party conducts and remedies
consumer laws
bankruptcy law
anti-monopoly law
intellectual property law
etc.

19. Speed of transition Big push all at once and painful
all prices liberalized at once
rapid privatization
change the system as fast as possible and so it cannot (before it can) be undone
the Washington Consensus
10 “simple” policy prescriptions
very controversial
Poland, some other CEE countries

20. Speed of transition Gradualism
it takes time to change institutions and laws
realization that transition is complex
sequencing and complementarities
experimentation might be warranted
could be reversed (political commitment issues)
Hungary, China
complementarities: elements of transition cannot be implemented in isolation

21. Initial conditions
if rules/institutions are lacking, things are done according to tradition
legacies of central planning
trade patterns
allocation of inputs/capital
ownership of resources
length of socialism  socialist culture
socialism was present in Russia since 1917 and in Eastern and Central Europe since WWII
level of development
agriculture vs. industry
per capita income