economic transition of centrally planned economies to liberal market economies basic facts basic...

Economic Transition of Economic Transition of Centrally Planned Centrally Planned

Economies to Liberal Economies to Liberal Market EconomiesMarket Economies

Basic FactsBasic Facts Basic MechanismsBasic Mechanisms

ReallocationReallocationDisorganizationDisorganizationRestructuringRestructuring

Partial AnalysisPartial Analysis Start of TransitionStart of Transition and the and the Initial Adjustment of Initial Adjustment of State FirmsState Firms

Global AnalysisGlobal Analysis The Benchmark ModelThe Benchmark Model

Basic FactsBasic Facts

Basic MechanismsBasic Mechanisms

ReallocationReallocation FromFrom PPublic ublic toto PPrivaterivate Sector = Sector =

PrivatizationPrivatization


DisorganizationDisorganization Collapse of CMEA (Council of Mutual Collapse of CMEA (Council of Mutual

Economic Aid = COMECON)Economic Aid = COMECON) The role of time horizonThe role of time horizon

Firms experience shortages of materialFirms experience shortages of material Long term relationships with suppliers had Long term relationships with suppliers had

been brokenbeen broken Macroeconomic Policies – problem of Macroeconomic Policies – problem of

inflationinflation


CPI inflationCPI inflation


RestructuringRestructuring Aim of restructuring is increase in Aim of restructuring is increase in

productivityproductivity Either decrease of employment or Either decrease of employment or

increase of outputincrease of output Fears of unemployment slow down Fears of unemployment slow down

restructuringrestructuring


Time on the Time on the horizontal ax horizontal ax


Real developmentReal development Specific situation of East GermanySpecific situation of East Germany The role of social factors in RussiaThe role of social factors in Russia


Restructuring and PrivatizationRestructuring and Privatization Barriers to RestructuringBarriers to Restructuring

Opposition of InsidersOpposition of Insiders Lack of CapitalLack of Capital

Privatization toPrivatization to InsidersInsiders OutsidersOutsiders

From Insider Ownership to ResaleFrom Insider Ownership to Resale

Partial AnalysisPartial Analysis

Start of transitionStart of transition price liberalization + removal price liberalization + removal

of subsidiesof subsidies

triggeredtriggered

the collapse of state firmsthe collapse of state firms growth in the new private growth in the new private

sector was insufficient to sector was insufficient to take up the slacktake up the slack


The Initial Adjustment of State The Initial Adjustment of State FirmsFirms SituationSituation

The Hardening of the Budget The Hardening of the Budget ConstraintConstraint

ReactionsReactions The Appropriation of profitsThe Appropriation of profits Delays in Payments of taxes and to Delays in Payments of taxes and to

SuppliersSuppliers Bad LoansBad Loans The Choice of Employment and WagesThe Choice of Employment and Wages

Global AnalysisGlobal Analysis

The Benchmark ModelThe Benchmark Model Interactions amongInteractions among

Growth of the new private sectorGrowth of the new private sectorRestructuring of the state firmsRestructuring of the state firmsUnemploymentUnemployment

Two Phases of TransitionTwo Phases of Transition1st : High unemployment prevents 1st : High unemployment prevents restructuring, action comes from private sector restructuring, action comes from private sector growth only.growth only.2nd : Economy proceeds along a balanced 2nd : Economy proceeds along a balanced path, where private sector employment path, where private sector employment creation absorbs the employment losses from creation absorbs the employment losses from restructuring. Output grows as a result of both restructuring. Output grows as a result of both reallocation and restructuring and reallocation and restructuring and unemployment remains constant until unemployment remains constant until transition has been achieved.transition has been achieved.


Assumptions of the benchmark Assumptions of the benchmark modelmodel

State and private sectorState and private sectorPre-transition is no unemploymentPre-transition is no unemploymentJust after the start of Just after the start of transformation (price liberalization, transformation (price liberalization, elimination of subsidies), elimination of subsidies), employment in state firms employment in state firms decreases and unemployment is decreases and unemployment is generatedgenerated


Summary of the first half of Summary of the first half of the modelthe model

Private employment creation Private employment creation depends on the profit rate. The depends on the profit rate. The profit rate depends in part on profit rate depends in part on the wage. The wage is a the wage. The wage is a decreasing function of decreasing function of unemployment. Thus, other unemployment. Thus, other things being equal, higher things being equal, higher unemployment leads to higher unemployment leads to higher private employment creation.private employment creation.


Summary of the second half Summary of the second half of the modelof the model

Restructuring of state firms Restructuring of state firms implies both an increase in implies both an increase in output and an increase in output and an increase in unemployment. The decision to unemployment. The decision to restructure depends, among restructure depends, among other things, on the state of the other things, on the state of the labor market: the higher the labor market: the higher the unemployment rate, the less unemployment rate, the less likely restructuring is to take likely restructuring is to take place.place.


Putting two halves togetherPutting two halves togetherIf initial unemployment is below If initial unemployment is below some critical value, then some some critical value, then some restructuring takes place restructuring takes place instantaneously until instantaneously until unemployment is equal to that unemployment is equal to that critical value. Transition then critical value. Transition then takes place at the constant takes place at the constant unemployment rate, with the unemployment rate, with the flow of lay-offs from flow of lay-offs from restructuring equal to the flow restructuring equal to the flow of hirings in the new private of hirings in the new private sector.sector.


If initial unemployment is above If initial unemployment is above some critical value, then there is some critical value, then there is no restructuring until private no restructuring until private employment creation has employment creation has decreased unemployment down decreased unemployment down to that critical level. At that to that critical level. At that point, the flow of restructuring point, the flow of restructuring starts and the economy follows a starts and the economy follows a balanced transition path with balanced transition path with constant unemployment.constant unemployment.

economic transition of centrally planned economies to liberal market economies basic facts basic...

Documents

restructuring slide

privatization slide

partial analysis slide

privatization restructuring

resale slide

slack slide

basic mechanisms time

benchmark model slide