jaromír Šindel eces discussion over the puzzles of transformation process the puzzles of central...

Jaromír Šindel

ECES

Discussion over the Puzzles of Transformation Process

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Topics• Main factor influencing the Transformation

Economic Policy– Impossible trinity (capital, interest and inflation

differentials), foreign capital, interest groups, …• Transformation Puzzles - best solutions?

– Gradual vs. rapid liberalization and deregulation, privatisation, transformation slowndown, law and transformation, monetary or exhchange rate based stabilization programmes, financial and bank crisis, foreign direct investment, structural changes, labor market, welfare state, …

– BUT: Initial conditions, methods of solutions, differences in transition process, …

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Initial Conditions

Source: Žák (2004)

Index of initial conditions (1989) and real economic growth (1993-1995)

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Index of Liberalization


Accrued Index of liberalization (1989-1997)

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Accrued = Cumulation of values from previous years. Maximum in 1997 is 9.

Index of Liberalization


Accrued Index of liberalization (1989-1997, horizontal axis) and real economic growth (1991-1997, vertical axis)

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Transformation Index - IDR


Democracy, Legal system, Reforms and IDR in the CEECs, 1997 against 2001

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Transformation Index - IDRT

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IDR in 1997 (horizontal axis, better on left side) and change of IDR in 1997-2001 (vertical axis, negative is better development)


Transformation IndexesT

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Small privatization, Trade and Exchange rate, Large privatisation, Price liberalization, Banking sector and Interest, Restructuralization, Securities, Trade Competition


Human Development Index - HDIT

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HDI in 1990 (horizontal axis, better on right side) and change of HDI in 1990-1999 (vertical axis, positive is better development)


Transformation Index - NIT

Source: http://www.freedomhouse.org/…Country Report

Nations in Transit, 1997 to 2005

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Slovakia




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Czech Republic




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Hungary




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Poland




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Bulgaria




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Romania




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Belarus

Centrally Planned Economy• Main Characteristics

– the nationalized economy

– the system of plans, centrally planned economy (Imperative planning x Indicative planning); 5-years plans

– non-existent market

– non-existent prices (no real prices with their information, allocation and motivating function), the distorted price system resulted in inefficient allocation of resources

– the prohibition of entrepreneurship

– the external relationships under CMEA – “soft market”

– lack of competition, large uneconomical companies

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Transition Process

• Requirements– 1. Liberalize the economy,

– 2. Stabilize the economy,

– 3. Restructuring the economy

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Kornai´ six characteristics of transformation process

1. Changes in the economic sphere in the direction of the capitalistic economic system;

2. Changes in the political field in the direction of democracy;

3. A complete transformation, parallel in all spheres (economy, political structure, political ideology, legal system, stratification of society);

4. Non-violent transformation;

5. Transformation under peaceful process;

6. Incredible speed

“The presence of all six characteristics together is unique in world history”

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Transition Process – Liberalize the economy

• Price liberalization– The end of Shortage Economy (Kornai) – price

didn’t reflex supply and demand relationships

– in Czech Republic• July 1990 – 10% increase due to foodstuffs prices,

respectively the abolition of subsidies (negative turnover tax)

• January 1990 – price deregulation – 85 % of GDP under price regulation in 1990 – in December 1991 only 6 % of GDP (rents, energy, water, health services, transportation and communication)

• Trade liberalization – in the later lecture

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Gradual vs. rapid liberalization and deregulation• Rapid

– Liberalize the economy

• Quick response of market and private sector

• Queues, uneconomic production and unwanted goods can be eliminated quickly

– If macroeconomic and structural conditions are right – quick recovery

– The macroeconomic discipline works – without low inflation no long-term growth

• Don’t forget on microeconomic view – the Czech Case 1995-1997

– Essential structural reform – enterprises have to face budget constraints

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Gradual vs. rapid liberalization and deregulation

• Gradualism – Danger that old system impedes the working of new forces of

the market economy

– Gradual price liberalization also gradual deregulation creates new deformation in the price structure. This new deformation need new subsidy, so never ending story of government intervention in market economy

• Flexibility– fiscal policy, exchange rate regime, …

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Transition Process – Restructuring the economy

• Restructuring the economy– deetatization,– the end of price controls,– the end of production plans,– the end of vertical relationships, …

– New tax system and the independent central bank for the effective implementation of stabilization economic policy

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PrivatisationT

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ES

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ueSource: World Bank, World Development Report: From Plan to Market, from Schejbal, J. (2002)

Other Ways and Solution - comparison

Method

Goal

Better Corporate

Governance

Speed and Feasibility

Better Access to Capital,

Know-how and Experts

Higher Government

Revenue

Greater Fairness

Sale to foreigners + - + + -

MBO / MEBO - + - - -

Voucher privatization ? + ? - +

PrivatisationT

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Reasons of Transformation Slowdown• Demand side

– Consumption – real wages decline (wage cushion with exchange rate cushion – important transition tools); increased savings by expectation of price liberalization with exchange rate devaluation and by uncertainty about future development.

– Investment – expectation lead to savings; obscure ownership delayed investment programme; restructuralization didn’t start.

– Government expenditures – changes in government; declined role of government in economy.

– Export – foreign demand – brake up of CMEA; search of new markets.

• Supply side shocks– Price increase of imported goods – devaluation of currency; oil

contract cancellation;– Price liberalization brought higher than expected supply shock– Government subsidy cancellation (rough budgetary limitations)– Managerial shock – new market environment

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How to get new Law – different views

• Law and finance theory– Choose the best institutional setting

• Institutional convergence has its limits by existing PATH DEPENDENCY

• Impossible to achieve the best results in CEE countries due to the path dependency and the political economy

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Law and Transformation

Monetary or Exchange Rate Based Stabilization Programme

Source: Frait, Komárek (1998)

Alternative exchange rate scenarios

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Exchange rate and transitionThe theoretical paths of the real exchange rate in transitional economies

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Following Generalisations about ER Path in Transition

a) Significant nominal exchange rate depreciation - the exchange rate flexibility at the beginning of the 1990s - Slovenia, Hungary, Poland.

b) fixed exchange rate - lower inflation (The Czech Republic, Slovakia, Estonia).

c) A trend towards real appreciation can be found in all accession countries, even though with profound differences. The strongest one is confirmed in Estonia and significantly applies also to the Czech Republic, Poland and Slovakia. On the other hand, Hungary and Slovenia experienced only mild real appreciation.– Real appreciation in Czech R. (Inflation differential) x Poland

(inflation caused by devaluation)d) convergence process - slowe) Since 1999 - switch from nominal exchange rate depreciation to

nominal exchange rate stability or even appreciation

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Competitiveness and ER appreciation – how to cope with it?

• Improve image and export at a higher price

• Increase labour productivity at constant wages

• Pay lower wages at unchanged productivity

• Shift from domestic production to more import

• Shift production to another country

• Exert political pressure against appreciation

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Financial and Bank Crisis• Crisis Indicators

– ...– Interest rate´s behaviour during crisis

• 1994, 1997, 1998– Russian Crisis

• Case studies in CEE countries– Hungary, Czech Republic, Estonia

• Banking sector

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Foreign Direct Investment and C&EE

• Transformation consequences

• Privatisation• Structural changes

• Integration consequences

• Better environment for foreign investment, better rating (OECD, NATO, EU, euro)

• Better growth

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Effects of FDI?

Source: Newton. Country Report. April 2001. www.newton.cz

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Technological Levels of Manufacturing Production (constant prices, %)

Source: Newton. Country Report, January 2002. www.newton.cz

–low-tech group (DA food products, beverages and tobacco; DB textiles and textile products; DC leather and leather products)

–medium/high-tech group (DK machinery and equipment; DL electrical and optical equipment; DM transport equipment)

–resource- (and scale-) intensive group (DD wood and wood products; DF coke, refined petroleum products and nuclear fuel; DG chemicals, chemical products and man-made fibres; DI other non-metallic mineral products)

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Structural Changes

Labour Market - Employment

Source: UNECE. Economic Survey of Europe, 2000 No. 2/3. www.unece.org

Employment trends in the CEECs, 1989-1999 (1989=100)

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Czech „unemployment miracle“

• delayed restructuring, with a relatively small output drop and job destruction

• early retirement schemes to shrink the labor force

• low unemployment benefits and strict application of eligibility criteria

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Source: IMF 2004, K. Krajnyák and M. Sommer

Welfare State - Gini coefficient

Source: Kornai, J., 2005.

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Pre-transition Mid-transition Post-transition Percentage change from

Country 1987-1989 1996-1997 2001-2002 pre- to post-transition

Czech Republic 19.8 23.9 23.4 18

Estonia 28.0 36.1 39.3 40

Hungary 22.5 25.4 26.7 19

Latvia 26.0 32.6 35.8 38

Lithuania 26.3 30.9 35.7 36

Poland 27.5 33.4 35.3 28

Slovakia 19.4 24.9 26.7 38

Slovenia 21.0 24.0 24.4 16

CEE 8 23.8 28.9 30.9 29

EU 15 26.9 27.8 28.6 7

jaromír Šindel eces discussion over the puzzles of transformation process the puzzles of central...

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