Models of Disequilibrium and Shortage in Centrally Planned Economies

INTERNATIONAL STUDIES IN ECONOMIC MODELLING

Series Editor Homa Motamen

Executive Director Canadian Imperial Bank of Commerce

Securities Europe Ltd London

Economic Modelling in the OECD Countries H. Motamen

Modelling the Labour Market M. Beenstock

Input-Output Analysis M. Ciaschini

In preparation

Economic Models of Latin America D. E. Hojman

Economic Models of Trade Unions P. Garonna

Models of Disequilibrium and Shortage in Centrally

Planned Economies

Edited by Christopher Davis

Centre for Russian and East European Studies University of Birmingham, UK

and

Wojciech Charemza Department of Economics

University of Leicester, UK and University of Gdansk, Poland

London

CHAPMAN AND HALL New York

First published in 1989 by Chapman and Hall Lid

J J New Fetter une, London EC4P 4EE Published in the USA by

Chapman and Hall 29 West 35th Street, New Yo rk N Y 10001

IS BN- 13: 978-94-0 I 0-6856-7 1)0 1: 10_10071978-94-009-0823-9

('- ISBN- 13: 978-94-009-0823-9

to 1989 Chapman atld Hall Lid

Typeset in JOI12pt Saban by Thomson Press (India) Lid

Soficovcr reprint of the hardcover I st edition 1989

All fighn reserved. No pan of this book may be reprinted or reproduced, or uti lized in any form or by any electronic, me<:hanical orother means, now known or hereafter invented, including photO(:opying and recording, or in any inform­ation storage and retrieval system, withoUi permission in writing from the

publishers.

British Library Cataloguing in Publication Data

Models of disequilib rium and shortage in centrally planned economies.-(International studies in economic modelling). 1. Planned economies. Econometric models I. Davis, C. (Christopher), II. Charemza, W. (Wojciech) II I. Series 330.12'4'0724

Library of Congress Cataloging in Publica/ion Data

Models of disequilibrium and shortage in centrally planned coonomies/edited by Christopher Davis and Wojcie<:h Charemza.

p. em.-(International studies in economic modelling} The volume resulted from Ihe Conference on Modelling of Disequilibrium and

Shorlage in Centrally Planned E<;onomies, held in Apr. 1987 al the University of Birmingham, Birmingham, England.

Bibliography: p. Includes inde)\". 1. Central planning- Poland-Econometric models-Congresses. 2.

Poland-E<;onomic p<)licy- 1981 - Economctric models-Congresses. 3. Cen­tral planning- Hungary- Economctric models----COngresscs. 4 Hungary­Economic policy-1968-Econometric models-Congresses. S. Central planning-Czechoslovakia-Econometric models-Congresses. 6. Czechos-lovakia- Econom ic policy-1965 - Econometric models- Congresses. 7. Equilibrium (Economics)-Congresscs. 8. Scarcity-Congresses. 1. Davis, Christopher, 1948-. II. Charemza, Wojcicch. 111. Conference on Modelling of Disequilibrium and Shortage in Centrally Planned Economies (1967: University of Birmingham) IV. Series. HC270.2B.M63 1989 338.9438-dc 19

88-31494 CIP

Contents

Contributors ' Vll

Acknowledgement IX

Introduction to the Series XI

Preface XlU

PAR T ONE The foundations of disequilibrium and shortage models of centrally planned economies 1

1 Introduction to models of disequilibrium and shortage m centrally planned economies 3 Christopher Davis and Woiciech Charemza

2 The theory and measurement of macroeconomic disequilibrium in centrally planned economies 27 Richard Portes

3 The economics of shortage in the centrally planned economies Paul Hare 49

4 The chronic excess demand hypothesis 83 David M. Kemme

5 Hidden and repressed inflation in Soviet-type economies: definitions, measurements and stabilization 101 Domenico Mario Nuti

6 Disequilibrium econometrics for centrally planned economies Richard E. Quandt

PAR T TWO Macroeconomic disequilibrium models of centrally planned economies

7 Disequilibrium models of the Czechoslovak economy Vladimir Dlouhy

147

179

181

VI Contents

8 Macroeconomic disequilibrium models of Poland 205 Wladyslaw Welfe

9 Macroeconomic disequilibrium models of Hungary 247 Katalin Hulyak

PART THREE Sectoral shortage and disequilibrium models of centrally planned economies 261

10 Sectoral shortage models in Hungary 263 Maria Lack6

11 Disequilibrium modelling of consumption m the centrally planned economy 283 Wojciech Charemza

12 Savings and consumption in the centrally planned economy: a dis-equilibrium approach 317 Aleksander Welfe

13 A disequilibrium approach to modelling foreign trade in centrally planned economies 333 Josef C. Brada and Arthur E. King

14 Disequilibrium models of investment 361 Irena Grosfeld

15 Reproduction of shortage in the Hungarian car market 375 Zsuzsa Kapitany, Janos Kornai and Judit Szab6

16 Modelling parallel markets in centrally planned economies: the case of the automobile market in Poland 405 Wojciech Charemza, Miroslaw Gronicki and Richard E. Quandt

17 Priority and the shortage model: the medical system in the socialist economy Christopher Davis

18 Conclusions and future prospects Wojciech Charemza and Christopher Davis

Index

427

461

473

Josef C. Brada

Wojciech Charemza

Christopher Davis

Vladimir Dlouhy

Miroslaw Gronicki

Irena Grosfeld

Paul Hare

Katalin Hulyak

Zsuzsa Kapitany

David'M. Kemme

Arthur E. King

Contributors

Department of Economics, Arizona State University, USA

Department of Economics, University of Leicester, UK and University of Gdansk, Poland

Centre for Russian and East European Studies, University of Birmingham, UK

Institute for Forecasting, Czechoslovak Academy of Sciences, Czechoslovakia

Department of Statistics, University of Gdansk, Poland

Centre d'Economie Quantitative et Comparative, France

Department of Economics, Heriot-Watt University, UK

Institute of Economic Planning, Hungary

Institute of Economics, Hungarian Academy of Sciences, Hungary

Department of Economics, Wichita State University, USA

Department of Economics, Lehigh University, USA

Vlll

Janos Kornai

Maria Lacko

Domenico Mario Nuti

Richard Portes

Richard E. Quandt

Judit Szabo

Aleksander Welfe

Wladyslaw Welfe

Contributors

Institute of Economics, Hungarian Academy of Sciences, Hungary and Harvard University, USA

Institute of Economics, Hungarian Academy of Sciences, Hungary

European University Institute, Italy

Centre for Economic Policy Research and Birkbeck College, UK

Department of Economics, Princeton Ul1iversity, USA

Institute of Economics, Hungarian Academy of Sciences, Hungary

Institute of Econometrics and Statistics, University of Lodz, Poland

Institute of Econometrics and Statistics, University of Lodz, Poland

Acknowledgement

This volume resulted from a conference supported by the Joint Committee on Eastern Europe, of the American Council of Learned Societies and the Social Science Research Council, with funds provided by the Ford Foundation.

Introduction to the Series

There has been a growing dependence in the past two decades on modelling as a tool for better understanding of the behaviour of economic systems, and as an aid in policy and decision making. Given the current state of the art globally, the introduction of a series such as this can be seen as a timely development. This series will provide a forum for volumes on both the theoretical and applied aspects of the subject.

International Studies in Economic Modelling is designed to present comprehen­sive volumes on modelling work in various areas of the economic discipline. In this respect one of the fundamental objectives is to provide a medium for ongoing review of the progression of the field.

There is no doubt that economic modelling will figure prominently in the affairs of government and in the running of the private sector, in efforts to achieve a more rational and efficient handling of economic affairs. By formally structuring an economic system, it is possible to simulate and investigate the effect of changes on the system. This in turn leads to a growing appreciation of the relevance of modelling techniques. Our aim is to provide sufficient space for authors to write authoritative handbooks, giving basic facts with an overview of the current economic models in specific areas and publish a useful series which will be consulted and used as an accessible source of reference.

The question may arise in some readers' minds as to the role of this series vis-a­vis other existing publications. At present, no other book series possesses the characteristics of International Studies in Economic Modelling and as such cannot fill the gap that will be bridged by it. Those journals which focus on this area do not present an exhaustive and comprehensive overview of a particular subject and all the developments in the field. Other journals which may contain economic modelling papers are not sufficiently broad to publish volumes on all aspects of modelling in a specific area, which this series is designed to cover.

A variety of topics will be included encompassing areas of both micro and macroeconomics, as well as the methodological aspects of model construction. Naturally, we are open to suggestions from all readers of, and contributors to, the series regarding its approach and content.

xu Introduction to the Series

Finally, I would like to thank all those who have helped the launch of this series. The encouraging response received from authors who have contributed the forthcoming volumes and from the subscribers to the series has indicated the need for such a publication.

Homa Motamen London

December 1987

Preface

The centrally planned economies (CPEs) of the Soviet Union and Eastern Europe have experienced severe imbalances in domestic and external markets over the past several decades. As a result, they have been chronically afflicted by problems such as excess demand, repressed inflation, deficits of commodities, queues, waiting lists, and forced savings. Economists have responded to these phenomena by developing appropriate theoretical and empirical models of CPEs. Of particular note have been the pioneering studies of Richard Portes on disequilibrium econometric models and Janos Kornai on the shortage economy. Each approach has attracted followers who have produced numerous, innovative macro- and microeconomic models of Poland, Czechoslovakia, the German Democratic Republic, Hungary, and the USSR.

These models have proved to be of considerable value in the analysis of the causes, consequences and remedies of disequilibrium phenomena. Inevitably, the new research has also generated controversies both between and within the schools of shortage and disequilibrium modelling, concerning the fundamental nature of the socialist economy, theoretical concepts and definitions, the specification of models, estimation techniques, interpretation of empirical findings, and policy recommend­ations. Furthermore, the research effort has been energetic but incomplete, so many gaps exist in the field.

The objectives of this volume on models of disequilibrium and shortage in CPEs are to provide comprehensive and coherent surveys of past work on this subject, identify key intellectual controversies, and fill some gaps in research. The book is intended for mainstream economists interested in disequilibrium phenomena and models as well as for specialists on the CPEs.

The book is divided into three parts. Part One examines the foundations of disequilibrium and shortage models. In Chapter 1 the editors review the history of disequilibrium phenomena in CPEs and the development of related models. Richard Portes surveys the field of disequilibrium econometric models in Chapter 2 and Paul Hare makes an equivalent assessment of the shortage model in Chapter 3. These are followed by evaluations of the chronic excess demand hypothesis by David Kemme and of repressed inflation by Domenico Mario Nuti. In Chapter 6

XIV Preface

Richard Quandt assesses the state of disequilibrium econometrics for CPEs. Part Two of the volume contains surveys of existing macroeconomic disequilibrium models of the CPEs by experts from the three countries that have been most studied: Vladimir Dlouhy on Czechoslovakia, Wladyslaw Welfe on Poland, and Katalin Hulyak on Hungary. Part Three is devoted to sectoral shortage and disequilibrium models. Maria Lack6 reviews sectoral shortage models in Hungary in Chapter 10. Next, Wojciech Charemza evaluates past disequilibrium models of consumption and presents an original model for Poland that incorporates second economy activities. Novel approaches to disequilibrium analysis are also adopted by Aleksander Welfe in his study of consumption and savings in Poland and by Josef Brada and Arthur King in their investigation of Soviet foreign trade. Disequilibrium models of investment in Poland are evaluated by Irena Grosfeld in Chapter 14. The next two chapters examine the same commodity market, for automobiles, using different modelling approaches. Zsuzsa Kapitany, Janos Kornai and Judit Szabo assess the automobile market in Hungary using a shortage model whereas Wojciech Charemza, Miroslaw Gronicki and Richard Quandt make use of a disequilibrium model to analyse the Polish car market. The sectoral studies are rounded off by the shortage model analysis of the socialist medical system by Christopher Davis. The final chapter by the editors assesses the contributions made in the book and outlines a future programme of research in the area of the modelling of disequilibrium and shortage in CPEs.

The editors designed the volume in 1986 and arranged contributions from leading analysts of disequilibrium and shortage in CPEs from both Western countries (USA, Britain, France and Italy) and Eastern Europe (Poland, Hungary and Czechoslovakia). The initial drafts of the chapters were presented and criticized at a working conference in Birmingham, UK in April 1987. (Unfortunately Janos Kornai, the founder of the 'shortage school', could not attend due to conflicting commitments.) The revised chapters were completed by early 1988.

The editors of the volume would like to express their gratitude to a number of institutions and people for their support. The individual and collaborative research of the editors in the field of modelling of disequilibrium and shortage in CPEs has been funded since September 1986 by grant no. B00232171 of the Economic and Social Research Council. The Centre for Russian and East European Studies of the University of Birmingham has provided an excellent institutional base for the editors.

The April 1987 Conference on Modelling of Disequilibrium and Shortage in Centrally Planned Economies was generously supported by a variety of organiz­atiol1s. The editors would like to give special thanks to the Joint Committee on Eastern Europe of the American Council of Learned Societies and the Social Science Research Council forthe major grant, based upon funds provided by the Ford Foundation, that made the conference possible. Supplemental assistance was provided by the BUAS-NASEES Joint Research and Development Committee, International Research and Exchanges Board (IREX), the University of Birmingham,

Preface xv

the British Council, the British Academy, and the Economic and Social Research Council.

The editors would like to express their appreciation to the numerous people who participated in or helped organize the conference. A strong team of specialists discussed and criticized the volume participants' papers. These included Ron Amann, John Burkett, Martin Cave, Irwin Collier, Julian Cooper, Robert W. Davies, Michael Ellman, Wojciech Maciejewski, Mark Schaffer, Karoly Attila Soos, Michael Spagat, and Thomas Wolf. Our ESRC project colleague David Young not only fully participated in the conference but also provided substantial organizational assistance. We are especially grateful for his contribution. Ad­ditional help with the conference was provided by Sandra Cumberland, Patricia Smith, Melanie Ilic, David Moon and by the programme designer Antonia Cunliffe Davis.

Three of the chapters of this book have been published earlier: Chapter 5 by D. M. Nuti in Contributions to Political Economy (1986); Chapter 15 by Z. Kapitany, J. Kornai and J. Szabo in Soviet Studies (1984); and Chapter 16 by W. Charemza, M. Gronicki and R. E. Quandt in European Economic Review (1988). The editors would like to thank the journals for granting permission to reprint these articles.

The editors are also most appreciative of the encouragement provided by the Editor of the Series on International Studies in Economic Modelling, Homa Motamen. Several people have been of considerable help in producing the book, particularly Phillip Read, Elizabeth Johnston and all the editorial and production staff at Chapman and Hall. Thanks are also due to Ceinwen Procter, the copy­editor.

Finally, the editors would like to thank their wives, Antonia Cunliffe Davis and Krystyna Charemza, for their valuable support of project research, conference organization, and book preparation.