ECON 4337 Comparative Economic Systems

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ECON 4337 Comparative Economic Systems

• Lecture 9
• March 31, 2009

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The Former Soviet Union
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Alternative Paths of Transition in the FSU

• 15 New Independent States (NIS)
• Commonwealth of Independent States (CIS)
• Signed by 12 post-Soviet states to form a loose
  economic and political association designed to
  address issues of common interest
• Baltic republics
• Estonia, Latvia, Lithuania
• Outperformed Russia and Russia outperformed the
  remainder of the republics

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Alternative Paths of Transition in the FSU
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Alternative Paths of Transition in the FSU

• Divergent Economic Cultures in the FSU
• First group Russia, Belarus, Ukraine, Northern
  Kazakhstan, Moldova
• More educated population in urban areas
• Collectivism and shared responsibility in rural
  areas
• Old population (especially in countryside) due to
  high percentage of retirees

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Alternative Paths of Transition in the FSU

• Divergent Economic Cultures in the FSU
• Second group Georgia, Armenia, Azerbaijan
• Civil wars and ethnic strife
• Georgia and Armenia have an urban population with
  high levels of education and higher incomes than
  the Azerbaijan population
• Huge size of the shadow economy (in Azerbaijan
  and Georgia increased to 60.6 and 62.6 by
  1995)
• Corruption and income inequality
• Agrarian economy

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Alternative Paths of Transition in the FSU

• Divergent Economic Cultures in the FSU
• Third group Estonia, Latvia, Lithuania
• Greater orientation toward individualism and
  respect for private property
• Longer exposure to market economies thanks to
  trade with the West
• High educational standards

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Alternative Paths of Transition in the FSU

• Divergent Economic Cultures in the FSU
• Fourth group Uzbekistan, Kazakhstan,
  Turkmenistan, Kyrgyzstan, Tajikistan (Sunni
  Muslim Central Asian countries)
• Large rural population, low levels of education
• Never had private ownership of land due to
  nomadic culture
• In general, water shortage in the region
  (exception Kyrgyzstan)

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Alternative Paths of Transition in the FSU
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Alternative Paths of Transition in the FSU

• The Legacies of Collective Autarky
• Forced economic isolationism, strong economic
  integration, limited access to world markets
• Interrepublican trade as a share of GNP in 1990
  was on average 29 (compared to the EU average of
  13.7)
• Implicit transfers to worse-off republics through
  subsidized prices
• Overdependence on raw materials and components
  from Russia

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Alternative Paths of Transition in the FSU

• The Legacies of Collective Autarky
• With the collapse of the USSR, interrepublican
  trade also declined
• Large declines in production
• Increased trade deficits
• Need to redirect trade elsewhere in the world

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Alternative Paths of Transition in the FSU

• The Legacies of Collective Autarky
• To sustain regional integration
• CIS formed in 1991
• Economic Cooperation Organization (ECO) formed in
  1992

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Alternative Paths of Transition in the FSU
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Alternative Paths of Transition in the FSU
() Data for 2001 show the share of the CIS in
individual countries exports and imports
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Alternative Paths of Transition in the FSU

• Monetary Disunion
• Decline in production due to collapse of trade
  and price liberalizations (hidden inflation)
  high inflation
• With the fear of a monetary crisis that might
  come from Russia, countries chose to abandon
  ruble for domestic circulation while IMF favored
  the ruble zone idea
• Ruble was used in interrepublican trade until
  1994 and controlled by the Central Bank of Russia
• Independent reforms required national authority
  over macroeconomic policy ? Ruble zone broke up

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Alternative Paths of Transition in the FSU
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Alternative Paths of Transition in the FSU

• Pace of Economic Transition
• Recovering countries Baltic republics and
  Armenia
• Experienced growth driven by foreign trade and
  FDI
• Laggards Belarus, Azerbaijan, Turkmenistan,
  Ukraine, Uzbekistan, Tajikistan
• Failed to stabilize their economies by 1994-95

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Alternative Paths of Transition in the FSU
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Alternative Paths of Transition in the FSU
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Alternative Paths of Transition in the FSU

• Pace of Economic Transition
• Baltic republics
• Estonia took advantage of its trade links with
  Finland, its small population and decisive
  privatization plans
• Latvia and Lithuania were slower in recovery
• Central Asia
• Uzbekistan experienced a smaller decline in GDP
• Self-sufficient in energy
• Large-scale cotton cultivation
• Low degree of industrialization
• Ukraine lags behind
• Energy dependence
• Heavily industrialized

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Alternative Paths of Transition in the FSU

• Pace of Economic Transition
• Gradual reforms in
• Uzbekistan (intentional)
• Turkmenistan (due to resistance)
• Belarus (due to resistance)

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Alternative Paths of Transition in the FSU
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Alternative Paths of Transition in the FSU

• Privatization
• Genetic philosophy
• takes into account the persistence of the
  institutional legacies of the socialist economy
  shows a preference for gradualism
• Normative philosophy
• defines the desirable outcome of an economic
  transition and embarks on concrete steps to
  achieve it
• NIS initially favored the normative approach to
  privatization

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Alternative Paths of Transition in the FSU

• Privatization
• Most successful examples of privatization were by
  the Baltic countries
• Ownership priority given to insiders and
  small-scale enterprises (except in Estonia)
• Foreign capital was accepted as a means of
  privatization

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Alternative Paths of Transition in the FSU

• Privatization
• Central Asia demonstrated much slower progress in
  privatization
• Except Kyrgyzstan who was successful in large
  enterprise privatization
• Lack of an entrepreneurial tradition
• Limited FDI
• Land reforms not received much attention

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Alternative Paths of Transition in the FSU

• Privatization
• Russia Mass privatization through vouchers
• Not resulted in creation of productively
  efficient enterprises
• Profit-promising enterprises as targets of
  oligarchic takeovers, shadow economy or mafia
• Insufficient enforcement of antimonopoly laws and
  property rights
• Ukraine Resistance from labor and farm managers
• Belarus Resistance from communists still
  remaining in most positions of power
• Moldova Major steps towards privatization with
  World Bank's support

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Poland The Peril and Promise of Shock Therapy
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Poland The Peril and Promise of Shock Therapy

• The Periods of Communist Rule (1947-1989)
• 1947-1956
• Stalinism (heavy industrialization under command
  socialism)
• Private agriculture
• 1957-1970 (Wladyslaw Gomulka)
• Halted efforts to collectivize agriculture
• Reduced persecution of Roman Catholic church

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Poland The Peril and Promise of Shock Therapy

• The Periods of Communist Rule (1947-1989)
• 1971-1981 (Edward Gierek)
• Rapid growth, though unbalanced and unsustainable
• Formation of large enterprises
• Gigontomaniac investment projects financed by
  foreign borrowing
• High debt-service ratios led to the end of growth
• Formation of the Solidarity trade union

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Poland The Peril and Promise of Shock Therapy

• The Periods of Communist Rule (1947-1989)
• 1982-1989 Military coup by Wojciech Jaruzelski
  in 1981
• Reformed Economic System (RES)
• Self-management
• Self-financing
• Independent enterprise
• Economy stabilized and grew
• Foreign borrowing increased (due to subsidies to
  maintain low food prices)
• Inflation reached 251 in 1989
• 1990 By a democratic election Jaruzelski was
  replaced by Walesa and communism ended

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Poland The Peril and Promise of Shock Therapy

• The Periods of Communist Rule (1947-1989)
• Income inequality
• Mid-ranked among Soviet bloc countries
• After communist period, Gini rose from .28 (1989)
  to .34 (1998)
• Environmental conditions
• In communist period, rarely collected and not
  very high fines
• Transition period, environmental policy as a
  success

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Poland The Peril and Promise of Shock Therapy

• The Periods of Communist Rule (1947-1989)
• Agriculture
• Differed from other Soviet bloc countries in that
  farms were not collectivized
• A state farm with 30 of the land was developed
• Agriculture was not very successful
• Why?
• Situation has not improved after transition either

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Poland The Peril and Promise of Shock Therapy
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Poland The Peril and Promise of Shock Therapy

• The Balcerowicz Plan
• Leszek Balcerowicz pro-laissez-faire Minister of
  Finance
• IMF advised plan
• Elimination of all price controls
• Devaluation of the zloty to a fixed exchange rate
  with the USD (led to trade surpluses)
• Complete convertibility
• Tight monetary policy (National Bank of Poland
  discount rate tripled)
• Reduction of subsidies for SOEs to reduce budget
  deficits
• Reduction of wage rate indexation to inflation
  from 80 to 30

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Poland The Peril and Promise of Shock Therapy

• The Balcerowicz Plan
• Output declined sharply (25 from 12/1989 to
  01/1990)
• Reduced demand due to lower wages
• Rising costs due to higher taxes
• Higher costs or availability of credit
• A gradual increase in unemployment
• Still a problem around 10
• Inflation remained under control (due to strict
  monetary and fiscal policy)

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Poland The Peril and Promise of Shock Therapy

• Privatization
• Gradual in nature
• Not complete
• Many large scale troubled enterprises (coal
  mining, steel production) remain state-owned
  (state-owned sector still produces about 40 of
  GDP)
• Process faced persistent opposition
• Multipath approach to privatization

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Poland The Peril and Promise of Shock Therapy

• Privatization
• 1990 Ministry of Privatization (MOP)
• Direct privatization Management or employee
  buyouts
• Liquidation of assets (of nonprofitable
  enterprises)
• Trade sales to specific buyers
• Offering stock on public capital markets
• 1993 National Investment Funds (NIFs)
• Dealt with restructuring of their management teams