TITLE

Eastern Europe and Former Soviet Union

Class 1

General Information

Approximately 26 separate economies now

About 430 millionroughly 2/3 in former Soviet

Unionwithin Eastern Europe

Poland (40M); Romania (25M)

Common theme

Transition from socialist to market

economies

Began in 1989 in Poland

Status on the eve of transition

0 5000 10000 15000 20000

Albania

Bulgaria

Kazakhstan

Moldova

Slovenia

Uzbekistan

Spain

GNP/Capita

UK, Italy

Portugal, Greece

Russia

(1988)

Substantial gap widening from early

1970s

0

1

2

3

4

5

6

1960-75 1975-80 1980-88

Czechoslovakia

Poland

Soviet Union

Annual growth rate

Krugman’s perspective

Early growth was primarily due to growth in economic inputs

a kind of economic growth that is self-limiting

as opposed to growth attributable to increases in output per unit of input

Why was state-led industrialization

adopted?Use the power of the state to

mobilize financial resources for rapid investment, particularly in basic industry

state owns the capital and can choose how to reinvest it.

Investment ratios, selected countries

0 10 20 30 40 50 60

Bulgaria

East Germany

Poland

West Germany

Industry investment in total investment (avg. 1965-73)

Investment in GDP (1980)

Other motivations

Belief that state-led growth would be more equitable:capital income would be shared

by the whole society, not a privileged few.

How did decisions get made regarding

What goods and services got produced

How the major factors of production got allocated

Can’t rely on market mechanismsbalances are achieved by

administrative procedures

CPSU sets output targets for crucial

commodities

GOSPLAN sets output targets for 2-300 product groups

Pro

ject

ed S

up

pli

es

Est

imat

ed D

eman

ds

Material Balances

Estimate input reqs.

Estimate input reqs.

Central ministries set production targets

EnterprisesEstimate input

reqs.

Remedies for Deficit Commodities

Increase planned outputincrease importsdraw upon stocksreduce inter-industry demandsreduce final (household)

demands

Pre-1990 a largely closed economic bloc

Most trade within the blocmonopolistic state agencies

controlled all foreign exchange transactions

total protection against foreign competition despite low formal tariff and non-tariff barriers

Why the unsatisfactory growth and well-being

performance?Jan Winieki. 1986. Are Soviet-type

economies entering an era of long term decline? Soviet Studies 38(3):325-348.

Jeffrey Sachs. 1996. Notes on the life-cycle of state-led industria-lization, Japan and the World Economy 8:153-174.

A fundamental problem

No private owners to monitor the performance of workers and managers

can’t rely on managers. Have little interest in resisting worker demands for higher compensation

state bureaucracy has frequently not performed this role well

Soviet-style Economic

Organization

Incentive Structure

Inflexibility of institutional structure

Lack of Specialization

Slowness to Innovate

Ability to Mobilize Resources for Large Projects

Jan Winieki’s model

Sachs’ elaboration on this theme

State enterprise was most successful in promoting mass production, homogeneous heavy industry and least successful in services

Not surprising, growth rates slowed when they reached development levels where specialized service activity tends to grow rapidly.

Symptoms of these weaknesses

High resource intensitydeteriorating investment

performancebloated share of industrial sector in

GDPincreasing demand for imports of

raw materials, parts and components, technology

deteriorating export performance