ECON 4337 Comparative Economic Systems

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ECON 4337 Comparative Economic Systems

• Lecture 10
• April 7, 2009

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Hungary Gradualism and Success?
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Hungary Gradualism and Success?

• Gradually transformed after 1968 New Economic
  Mechanism (1968)
• In 1989, moved away from communism peacefully
• Went from being a market socialist economy to
  social market economy

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• From Stalinism to Revolution (1945-1956)
• 1949 Stalinist Matyas Rakosi declared a
  one-party dictatorship of proletariat at the
  end of a rigged election

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• From Stalinism to Revolution (1945-1956)
• 1950 First Five Year Plan
• Heavy industrialization
• Efforts to collectivize land
• Specialization in
• Transportation equipment and vehicles
• Electronics
• Food

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• From Stalinism to Revolution (1945-1956)
• 1950-1953
• Growth exceeding 8 per year
• Increasing income equality
• Reductions in economic discrimination against
  women and Gypsies
• Intense repression and jailings

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• From Stalinism to Revolution (1945-1956)
• 1953-1955 (Imre Nagy)?
• The New Course
• Ending collectivizing agriculture
• Investment from heavy to light industry
• Reformers calling for decentralized decision
  making Gyorgy Peter Janos Kornai (soft budget
  constraints)?

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• From Stalinism to Revolution (1945-1956)
• 1955 Power returned to Rakosi
• Removed in July 1956
• October 1956 Nagy was reinstated
• Mass uprisings occurred
• Nagy announced Hungary's withdrawal from the
  Warsaw Pact and adoption of political neutrality
• Soviet troops put the revolt down

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• From 1956 to 1989
• 1957-1967 (Janos Kadar)?
• Full collectivization of agriculture
• Gradual industrialization
• Growth rate 5.7 on average
• Relaxed the repression
• Supported Soviet foreign policy

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• From 1956 to 1989
• 1968-1989 The New Economic Mechanism
• Janos Kadar
• End of short-term central command economy
• Decentralization efforts
• Profitability rewards
• ¼ of prices to be set by market forces
• Firm autonomy over investment out of retained
  profits
• Managerial discretion in setting wages and in
  hiring and firing
• Free trade

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• From 1956 to 1989
• 1968-1989 The New Economic Mechanism
• After 1972 Pressure from largest firms and the
  trade unions
• Subsidies increased
• Soft budget constraints
• Growth averaged 5.2 in 1972-78 but then slowed
  down
• Foreign debt started to increase

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• From 1956 to 1989
• 1968-1989 The New Economic Mechanism
• 1979 Highest per capita foreign debt of any CMEA
  nation
• First Soviet bloc nation to join the IMF and the
  World Bank
• Tight monetary policy and restrictions on imports
• Removal of central control from about 50 of
  prices
• Emergence of a second economy
• Overall growth 1.1 between 1979-1984

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• From 1956 to 1989
• 1968-1989 The New Economic Mechanism
• After 1985
• Agriculture freed from central orders
• Worker-elected managers
• Limited worker's management
• Move toward cooperatives
• Loosening of restrictions on foreign trade
• Loosening of controls on prices
• 1987 Establishment of decentralized commercial
  banking

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• From 1956 to 1989
• 1968-1989 The New Economic Mechanism
• 1988
• Kadar was replaced by Karoly Grosz
• Commitment to move toward market capitalism
• The 1988 Act on Enterprises triggering a wave
  of spontaneous privatizations
• Managers in position to sell to themselves,
  friends, or foreigners at ridiculously low prices
  
• Not real popular with the ordinary people

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• 1968-1988 Was It Really Market Socialism?
• Yes
• Means of production remained in state hands
• Many prices were decontrolled but many remained
  controlled, too
• No
• High degree of monopolization (Anti-Manchesterian)
  ?

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Hungary Gradualism and Success?

• Economic Policies Under Communism
• Macroeconomic Performance
• High inflation due to soft budget constraints
• Fairly steady growth
• Single-digit inflation
• Very low unemployment
• Few lines

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Hungary Gradualism and Success?
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Hungary Gradualism and Success?

• Economic Policies Under Communism
• Income distribution and social safety
• 1986 More equal than Poland, USSR, UK and rest
  of Soviet bloc (except Czechoslovakia)?
• 1977-1987 poverty between 11-17
• Very generous social safety net 25 of average
  earnings
• Male life expectancy declined (from 66.3 in 1970
• to 64.6 in 1992)?
• World's highest suicide rate (in 1981 45.6 per
  100,000)?

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Hungary Gradualism and Success?

• The Post-1989 Transition
• 1990
• Non-communist government came to power under
  Jozsef Antall
• 1991 Dissolution of the Warsaw Pact
• Hungary joined the Visegrad Group
• 1994
• Gyula Horn won the election (Economic
  policymaker Lajos Bokros)?
• Fiscal austerity program and incomes policy
• Cuts on generous social safety net (from 20 of
  GDP in 1994 to 14.7 of GDP in 1997)?

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Hungary Gradualism and Success?

• The Post-1989 Transition
• Privatization
• 1990 State Property Agency (SPA) founded
• Sold firms at full value to cash-paying buyers
  (mainly foreign firms) either on the stock market
  in open auctions or after negotiations
• Worker-management buyouts not encouraged
• New enterprises have been formed by domestic
  entrepreneurs
• Gradual in approach
• Hardest budget constraints in any of the FSU
  countries

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Hungary Gradualism and Success?

• The Post-1989 Transition
• Macroeconomic Performance
• 1988-1993
• Output declined but less than in most other FSU
  countries
• Inflation was moderate and improving
• Unemployment was high
• Bokros reforms in 1995
• Steady growth in RGDP per capita
• Unemployment steadily declining
• Inflation rate still 4.8 in 2002

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Hungary Gradualism and Success?
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Hungary Gradualism and Success?
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Hungary Gradualism and Success?
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Hungary Gradualism and Success?
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Hungary Gradualism and Success?

• The Post-1989 Transition
• Distribution of Income
• Gini rose from 0.237 in 1989 to 0.308 in 1996
• Still have a relatively generous social safety
  net
• Regional income gap

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Hungary Gradualism and Success?

• The Post-1989 Transition
• Agricultural Performance
• Huge decline in agricultural production
• Bad weather
• Breakup of the CMEA and resulting loss of foreign
  markets not replaced by Western ones (due to
  protectionism of the EU)?
• Emergence of severe uncertainty regarding
  property rights in agriculture

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Hungary Gradualism and Success?

• The Post-1989 Transition
• Foreign Trade and Investment
• High foreign debt
• Gradually being paid off
• Large amount of FDI
• Investment-friendly policies
• Relatively stable economy

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Yugoslavia Worker-Managed Market Socialism
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Yugoslavia Worker-Managed Market Socialism

• Historical and Cultural Background
• 26 ethnic groups speaking 18 languages
• Two largest groups
• Serbs (East, Orthodox)?
• Croats (West, Roman Catholic)?
• Slovenia
• Croatia
• Bosnia-Herzegovina
• Montenegro
• Serbia
• Kosovo
• Macedonia

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Yugoslavia Worker-Managed Market Socialism
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Yugoslavia Worker-Managed Market Socialism

• From 1918 to 1950
• Autarky with high tariffs and state regulation of
  industries
• 1930s Bilateral trade with Nazi Germany and its
  allies
• Invasion of 1941

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Yugoslavia Worker-Managed Market Socialism

• From 1918 to 1950
• Stalinist Tito
• Rapid nationalization of industry during 1946
• Introduction of the First Five-Year Plan in 1947
• Collectivization of agriculture initiated in 1949
  (mostly reversed after 1951)?
• Tito seen as another Stalin
• June 28, 1948 Political break with Stalin
• Stalinist policies continued until 1950

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Yugoslavia Worker-Managed Market Socialism

• Worker-Managed Market Socialism
• Theoretical Issues
• Jaroslav Vaneks five characteristics
• Yugoslavia failed to have free markets and
  payment for the use of capital

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Yugoslavia Worker-Managed Market Socialism

• Worker-Managed Market Socialism
• Theoretical Issues
• Jaroslav Vanek
• Worker-managed economy can achieve Pareto
  optimality
• Factors are paid their MR
• Employment will be more stable
• Capital accumulation rates will be high
• Firms will be smaller with less monopoly power
• No systematic tendency to inflation
• Productivity will tend to improve
• Applies to a labor-managed economy that is
  capitalist

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Yugoslavia Worker-Managed Market Socialism

• Worker-Managed Market Socialism
• Theoretical Issues
• Soft budget constraints had a peculiar form in
  Yugoslavia
• Not direct firm subsidies
• Loans were made by republic-level or lower banks
  at negative real interest rates
• Result inflation

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Yugoslavia Worker-Managed Market Socialism

• Worker-Managed Market Socialism
• Implementation
• 1950 Worker's Council Law
• Required supreme controlling body of an
  enterprise to be a worker's council elected by
  the workers themselves
• Council would appoint a management board
  including workers and the enterprise director,
  who would jointly determine the organization of
  production, purchase of inputs, shop-floor
  conditions, marketing, financing, and wage and
  salary policies
• Control over pricing and investment devolved to
  these worker-managed enterprises later

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Yugoslavia Worker-Managed Market Socialism

• Worker-Managed Market Socialism
• Implementation
• 1966-1970 the Fourth Five-Year Plan
• Purely indicative
• Price setting was in the hands of the individual
  enterprises
• Control of investment was divided between the
  firms, banks and local governments

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Yugoslavia Worker-Managed Market Socialism

• Worker-Managed Market Socialism
• Implementation
• 1970s
• System shifted to integrally planned worker
  management due to merger wave that reduced the
  ability of workers to control their managers
• 1976 Law of Associated Labor
• Reintroduced planning at the local level for
  consistency at the national level

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Yugoslavia Worker-Managed Market Socialism

• Worker-Managed Market Socialism
• Breakdown
• Tito died in 1980
• Economic performance deteriorated
• Interregional tensions increased
• After 1986, output declined while inflation
  accelerated

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Yugoslavia Worker-Managed Market Socialism

• Worker-Managed Market Socialism
• Breakdown
• 1989 movement toward market capitalism
• Laws allowing privatization and foreign
  investment
• 1990
• Increased control over money supply
• Effort to unify tax systems
• To regulate fiscal policy from the center
• To eliminate ceilings on land holdings
• To remove remaining restrictions on prices and
  foreign exchange transactions
• Anti-inflation drive wage-price freezes, credit
  limits, strict linking of dinar to deutschemark
  (inflation reduced from 1256 in 1989 to 121.7
  in 1990)?

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Yugoslavia Worker-Managed Market Socialism

• Macroeconomic Performance
• Was it worker-managed market socialism?
• No
• Enterprise directors were in control not the
  semi-skilled or unskilled workers
• Enterprise decision making was heavily influenced
  by outsiders
• Entry of new firms was restricted

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Yugoslavia Worker-Managed Market Socialism
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Yugoslavia Worker-Managed Market Socialism

• Macroeconomic Performance
• Distribution of Income
• Had a greater equality of wages than in other
  countries
• From 1987 onwards, equality was destroyed

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Yugoslavia Worker-Managed Market Socialism

• Macroeconomic Performance
• Foreign Economic Relations
• Chronic trade deficits and large foreign debts
• Small intra-republic trade
• Republics tried to remain self-sufficient