Transition: Objectives and Experiences

1
Transition Objectives and Experiences

• Objectives
• Markets
• Improving allocative efficiency by introducing
  market institution and competition
• Firms
• Providing better incentives by restructuring
  corporate governance arrangements and creating
  private ownership
• Governments
• Creating government institutions adequate for a
  market economy

2
Transition Objectives and Experiences

• Approaches
• Big Bang versus Gradual Reform
• Sequencing in economic reforms
• Sequencing between economic reform and political
  reform

3
Transition Objectives and Experiences

• Washington Consensus Beliefs
• Political economy
• Breaking existing communist state structure,
  replacing with efficient legal structure
• Using window opportunity to generate
  irreversibility in reform
• Private owners will become major support for
  reform
• Resource reallocation
• Markets will take care of spontaneously
• Close down inefficient state enterprises
• Corporate governance
• Mass privatization
• Role of government
• Diminish and prevent it from intervening the
  market

4
Transition Objectives and Experiences

• Washington Consensus Advocacy
• Macro stabilization
• Wholesale liberalization
• Quick privatization
• Weaken and shrink government

5
Transition Objectives and Experiences

• Two Worlds of Experience
• Output fall for most and slow recovering for some
• Abysmal performance of privatization
• Organized crime
• Breakup of nations
• Fall of Communist and electoral backlash
• China

6
Transition Objectives and Experiences

• The Growth Pattern of Russia and Central Europe
• (source Blanchard (1997), GDP, value in the year
  before transition 1)

7
Transition Objectives and Experiences
8
Introduction

• How to Get There The Divergent Transition
  Experience

9
Transition Objectives and Experiences

• Constraints in Transition
• Knowledge Constraints
• Uncertainty
• Institutional Constraints
• Complementarities and interactions between
  reforms
• Political constraints
• Politics is endogenous
• Resource Constraints

10
Market Liberalization

• Partial versus wholesale liberalization (Murphy,
  Shleifer, and Vishny)
• Partial reform can result in a substantial
  diversion of resources into inefficient uses
• Result may be a reduction of total output

11
Partial v.s Wholesale Liberalization

• Benchmark the case of planning

P
P
Qb
Qh
Industry b
Industry h
Aggregate
12
Partial v.s Wholesale Liberalization

• Liberalizing the housing sector

Welfare loss
P
P
Qb
Qh
Industry b
Industry h
Aggregate
13
Partial v.s Wholesale Liberalization

• Some comparative statics

P
P
Qb
Qh
Industry b
Industry h
Aggregate
14
Partial v.s Wholesale Liberalization

• Some comparative statics

P
P
Qb
Qh
Industry b
Industry h
Aggregate
15
Partial v.s Wholesale Liberalization

• The case of inefficient rationing favoring the
  boxcar sector
• Planning

P
P
Qb
Qh
Industry b
Industry h
Aggregate
16
Partial v.s Wholesale Liberalization

• The case of inefficient rationing favoring the
  boxcar sector
• Liberalizing the housing sector

Change in welfare
P
P
Qb
Qh
Industry b
Industry h
Aggregate
17
Partial v.s Wholesale Liberalization

• Quota with state enforcement welfare gain and
  yet still inefficient

P
Qh
Qb
Industry b
Industry h
Aggregate
18
Price Dual Track

• Demand and supply under random allocation

Q
Q
Market (efficient allocation of producers and
users)
Planning (with random allocation of producers and
users)
19
Price Dual Track
Buy from market for delivery
Sell at market
PP
Pm
Supply 4 Demand 3
Q
Resell delivery to market
Buy at market
20
Price Dual Track
Buy from market for delivery
Sell at market
PP
Supply 4 Demand 4
Pm
Q
Resell delivery to market
Buy at market
21
Price Dual Track
Buy from market for delivery
Sell at market
Pm
Supply 4 Demand 4
PP
Q
Resell delivery to market
Buy at market
22
Price Dual Track

• Using Standard Demand and Supply

Market Track Buy at Pm
S
Plan Track Buy at Pm and sell at PP
Pm
Plan Track Buy at PP
Plan Track Buy at PP and sell at Pm
PP
Plan Track Sell at PP
D
Q
Market Track Sell at Pm
23
Price Dual Track

• Price dual track restores market equilibrium

S
Pm
PP
D
Q