title eastern europe and former soviet union class 1
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Eastern Europe and Former Soviet Union
Class 1
General Information
Approximately 26 separate economies now
About 430 millionroughly 2/3 in former Soviet
Unionwithin Eastern Europe
Poland (40M); Romania (25M)
Common theme
Transition from socialist to market
economies
Began in 1989 in Poland
Status on the eve of transition
0 5000 10000 15000 20000
Albania
Bulgaria
Kazakhstan
Moldova
Slovenia
Uzbekistan
Spain
GNP/Capita
UK, Italy
Portugal, Greece
Russia
(1988)
Substantial gap widening from early
1970s
0
1
2
3
4
5
6
1960-75 1975-80 1980-88
Czechoslovakia
Poland
Soviet Union
Annual growth rate
Krugman’s perspective
Early growth was primarily due to growth in economic inputs
a kind of economic growth that is self-limiting
as opposed to growth attributable to increases in output per unit of input
Why was state-led industrialization
adopted?Use the power of the state to
mobilize financial resources for rapid investment, particularly in basic industry
state owns the capital and can choose how to reinvest it.
Investment ratios, selected countries
0 10 20 30 40 50 60
Bulgaria
East Germany
Poland
West Germany
Industry investment in total investment (avg. 1965-73)
Investment in GDP (1980)
Other motivations
Belief that state-led growth would be more equitable:capital income would be shared
by the whole society, not a privileged few.
How did decisions get made regarding
What goods and services got produced
How the major factors of production got allocated
Can’t rely on market mechanismsbalances are achieved by
administrative procedures
CPSU sets output targets for crucial
commodities
GOSPLAN sets output targets for 2-300 product groups
Pro
ject
ed S
up
pli
es
Est
imat
ed D
eman
ds
Material Balances
Estimate input reqs.
Estimate input reqs.
Central ministries set production targets
EnterprisesEstimate input
reqs.
Remedies for Deficit Commodities
Increase planned outputincrease importsdraw upon stocksreduce inter-industry demandsreduce final (household)
demands
Pre-1990 a largely closed economic bloc
Most trade within the blocmonopolistic state agencies
controlled all foreign exchange transactions
total protection against foreign competition despite low formal tariff and non-tariff barriers
Why the unsatisfactory growth and well-being
performance?Jan Winieki. 1986. Are Soviet-type
economies entering an era of long term decline? Soviet Studies 38(3):325-348.
Jeffrey Sachs. 1996. Notes on the life-cycle of state-led industria-lization, Japan and the World Economy 8:153-174.
A fundamental problem
No private owners to monitor the performance of workers and managers
can’t rely on managers. Have little interest in resisting worker demands for higher compensation
state bureaucracy has frequently not performed this role well
Soviet-style Economic
Organization
Incentive Structure
Inflexibility of institutional structure
Lack of Specialization
Slowness to Innovate
Ability to Mobilize Resources for Large Projects
Jan Winieki’s model
Sachs’ elaboration on this theme
State enterprise was most successful in promoting mass production, homogeneous heavy industry and least successful in services
Not surprising, growth rates slowed when they reached development levels where specialized service activity tends to grow rapidly.
Symptoms of these weaknesses
High resource intensitydeteriorating investment
performancebloated share of industrial sector in
GDPincreasing demand for imports of
raw materials, parts and components, technology
deteriorating export performance
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