Economics of Transition

Barry W. IckesSpring 2007

What is Transition

• Transition is development economics from different initial conditions– Developing economies start poor– Transition economies were poor

countries that adopted strange institutions to develop

– The key question of transition economics is how to get back to the normal road of economic development• Without having to double back

Founding Fathers

Magnitogorsk

Chelyabinsk Tractor Factory

Norilsk

Gdansk Shipyards

Antonov

Berlin Wall

Transition

Transition Figures

Comparative Economics vs Economics of Transition

• The study of comparative economic systems was much like economic pathology. – We studied how economic systems that were "sick"

operated. – What happens to the economic system when its

nervous system is seriously distorted?

• Economics of Transition is then the study of therapy: ∙ – How does an economic system suffering from such

pathology recover? – It is the study of restoring the health of an economic

system.

Evolution and Transition

• Compelling issue of transition economics is that simply removing distortions and impediments to markets does not accomplish the task of economic renewal.– Institutional change is complex and painful

• Development is the process of turning a less complex organism into a more complex one

• Transition is very different. – It can be likened to changing the organism from

one type to another• Transition economies differ in terms of how

long they spent on the “wrong” path

Human Evolution

homo habilis

neanderthal homo sapien

Economic Evolution

pre-industrialeconomy

socialism capitalism

The main ingredients of the transition process

• Liberalization• Macroeconomic stabilization• Restructuring and privatization • Legal and institutional reforms• But what order and what to

emphasize first?

Some Transition Puzzles

• The Output Fall– The Uzbek Growth Puzzle

• Returns to human capital• Re-demonetization• Value destroying activities are retained

– Difficulty of eliminating soft-budget constraints

• Geography matters– The Great Divide

• Privatization and efficiency

Transition Questions1. Do differences in transition outcomes reflect

primarily reform strategies or initial conditions? 2. Is it necessary to begin with liberalization and

stabilization? 3. How crucial is privatization to marketization?4. Does transition require that a gulf emerge

between winners and losers? 5. Is there only one path that the transition can

take? Or are there alternatives to the Washington consensus?

6. How long will the transition last?• When is transition over?

Inflation by Region

Figure 1: Official GDP Growth in Central and Eastern Europe

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

140.00

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

1989=100

ALBANIA BULGARIA CROATIA CZECH REPUBLIC HUNGARY

POLAND ROMANIA SLOVAK REPUBLIC SLOVENIA

GDP in CEE’s

Figure 2: GDP in the Former Soviet Union, 1989-2000

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

ARMENIA AZERBAIJAN BELARUS ESTONIA GEORGIA

KAZAKHSTAN KYRGYZ REPUBLIC LATVIA LITHUANIA MOLDOVA

RUSSIA TAJIKISTAN TURKMENISTAN UKRAINE UZBEKISTAN

GDP in FSU

Depth of Transition and Distance from Brussels

Current GDP and Distance to Brussels

Evolution by Region

China and India in the Long View

0

500

1000

1500

2000

2500

3000

3500

1700 1820 1870 1913 1950 1973 1998

India China

Chinese Poverty