eastern europe and the former soviet union class 2: the transition period
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Eastern Europe and the Former Soviet
UnionClass 2:
The Transition Period
Begins January 1, 1989
• Poland launches big bang stabilization program
• had been earlier attempts at reform but. . .
Dimensions of transformation under
wayFrom planned to market
economiesIntegration into global
economyPolitical territorial
fragmentation
Major issue re. market economy often ignoredWhat kind of a market
economy are these countries aiming for???Liberal market economy
(U.S. model)Welfare state (Western
European model)
Primary components of transition to a market
economyPrivatization
change in ownership structureMarketization
substitution of the price mechanism to bring supply and demand into balance and to allocate factors of production
Integration into global economy
Necessary to adjust internal prices and output structure to world market conditions
ProblemHow to expand exports???
Additional issue--social safety net problem
Old system relied on full employment labor market and distribution of benefits by enterprises
unemployment increases in transition and enterprises cannot act as benefactors and still compete
state lacks the funds to increase social welfare spending
-12
-10
-8
-6
-4
-2
0
1989* 1990 1991 1992 1993 1994
Fiscal balance(% of GDP)
0
200
400
600
800
1000
1200
1400
1600
1989* 1990 1991 1992 1993 1994
Averageinflation
50
60
70
80
90
100
110
1989* 1990 1991 1992 1993 1994
Real GDP(1989=100)
-20
-15
-10
-5
0
5
1989* 1990 1991 1992 1993 1994
Real GDPgrowth
Growth, Inflation and Fiscal Balance in Calendar Time: All Transition
Economies
What is responsible for the slump in
output???• Collapse of CMEA trade• Substantial industrial output
became uneconomic under the new market prices
• Tighter credit restrictions needed to control inflation made it difficult for even viable enterprises to get access to credit
Reservations
1. Growth, Inflation and Fiscal Balance in
Stabilization Time
-15
-10
-5
0
5
T-4 T-3 T-2 T-1 T T+1 T+2 T+3
Real GDP growth
40
50
60
70
80
90
100
110
T-4 T-3 T-2 T-1 T T+1 T+2 T+3
Real GDP(T-4=100)
0
200
400
600
800
1000
1200
1400
1600
T-4 T-3 T-2 T-1 T T+1 T+2 T+3
Averageinflation
-12
-10
-8
-6
-4
-2
0
T-4 T-3 T-2 T-1 T T+1 T+2 T+3
Fiscal balance (%of GDP)
Inflation-Growth correlation, average of
1992-94
Padma Desai’s perspective
• High vs. medium and low-speed reformers• High Speed reformers got an early start and
adopted more comprehensive reform– price decontrol– fiscal and monetary tightening to reduce inflation– convertibility of currency– trade liberalization– privatization
Findings
BUT
Implications???
• One perspective. Not a significant problem. Faster growth will eventually provide more employment
• Alternative perspective. The high unemployment rate may make it impossible, politically, to sustain an economic reform package before this can happen
2.Data problemsPrices at which goods were valued
before transition were significantly out of linequality of goods was typically very poor
Need to build new statistical services.Earlier systems set up to measure state
sector outputincreasing share of output is not recorded
(unofficial economy)incentives
How to estimate the size of the unofficial
economy???A macroelectric approachbased on observed correlations
between GDP and total electrical use.use trends in total electrical
consumption as a proxy for trends in the overall economy
subtract est. of change in official economy to estimate unofficial economy
The example of Ukraine
1989 1990 1991 1992 1993 1994Growth inelectricityconsumption
--- 1.0% -2.2% -6.2% -7.8% -11.7%
Est. GDP growthrate
--- 1.0% -2.2% -6.2% -7.8% -11.7%
Overall GDP index(1989-100)
100.00 101.0 98.8 92.7 85.4 75.4
Official GDP index(1989=88)
88.0 84.7 73.3 60.5 51.5 38.9
Unofficialeconomy index
12.0 16.3 25.5 32.2 34.0 36.6
Results for the region
0 20 40 60 80 100
Poland
Czech
Estonia
Kazakhsta
Lithuania
Georgia
Official GDPdecline
Overall GDPdecline
Recent Trends--variability
(World Bank web site)Polandby 1994 real GDP exceeds 1989GDP growth rate is 6.2%/year--
1994-97Hungary
1997 14.4% 1998 5.1%Czech. Rep.
1994 3% 1995 6%
1997 0.3% 1998 -2.3%
Latvia1995 -3.1% 1997
8.6%Russia 1998 -4.6%Ukraine1998 -1.7%
(ripple effect from Russia)Kazakhstan same problem.
Financial crisis--> fall in commodity prices-->falling GDP in 1998.