Transition%20Economies

1
Transition Economies

• A brief analysis

2
The former Communist economies

• Self sufficient COMECON stayed non-reliant on
  western economies
• Did not use price system to send messages as we
  do in market economies
• Invested large proportions of GDP in capital
  goods wanted to succeed against western
  alternatives
• No property rights everything central
• Central Planning input-output analysis

3
International Trade

• 75 of trade internal external trade mainly
  for essentials used to build industries
• Seldom applied comparative advantage
• 5 year plans and each state exchanged within
  COMECON.
• Price system not used. Trade credits given and
  could only be used with other COMECON members

4
Banking System

• ALL State owned
• Foreign Trade and Agriculture dealt with by
  separate banks
• Independent Savings Bank money was not
  transferable and so could NOT act as a medium of
  exchange

5
Problems?

• Inefficiencies in collective ownership
• Target satisfied line manager
• Quality not always apparent in targets
• Bonuses not related to quality
• Monopoly position did they produce at lowest
  AC?
• Shortages of basics but good supplies of capital
  equipment

6
Problems 2?

• Supply-side problems
• Hidden unemployment
• Suppressed inflation
• Budget deficits
• Lack of incentives
• Smuggling
• General tensions

7
Big changes

• Price liberalisation controls off, standards of
  living fell
• All system had under priced and supplied queues
• End of subsidies SOEs did this in phases to
  avoid political unrest
• Privatisation the profit motive, redundancies,
  huge wealth for a few, lack of managers, some
  overseas investors used.

8
Big changes - 2

• Trade liberalisation end of State monopolies
  currency convertibility? (FIXED)
• Then resources could be allocated as per
  comparative advantage
• End of tariffs, quotas and non-tariff barriers
  level playing field but for who?
• International currency now enters, imports also
  and law of contract enforced

9
Institutions needed?

• Independent Central bank
• Financial system channel savings, encourage
  investment
• Regulatory bodies to oversee financial sector
• Market for bond selling
• No one model suits all

10
Costs of transition?

• Inflation partly a one-off jump but some
  monetary overhang allowed for extra purchases.
  Also wages allowed to rise faster than
  productivity.
• GDP fell initially plus increased unemployment.
• Macro problems recession fall in government
  revenues, social protection down, budget deficit
  up, pressure on bond market. Printed lots of
  money!!

11
Conclusions - 1

• Shock tactics seem to have worked better than
  gradualist approach
• Those who controlled inflation became stronger
  quicker
• Regulations had to be attractive to FDI. Then
  technology and skills transfer can take place.
  MULTIPLIER EFFECT.
• Increases in labour productivity NOT fully
  rewarded

12
Conclusions - 2

• Those who succeeded in channelling savings into
  investment grew faster
• Geographic location helped. Those nearer to EU
  tended to adapt and grow more quickly. Also
  removal of Soviet troops slowed some e.g.
  Estonia.
• Transition monies from EU flowed as part of
  Agenda 200.
• Will EU become a two-tier club?