17. Transition

17. Transition

Economic Systems Ohio Wesleyan University Goran Skosples 17. Transition Transition not a _______ of the existing system, but a _______________ of the current system with a new system involves virtually all aspects of the economy: micro-, macro-economics, property rights, legal institutions, trade, social safety net, financial sector,...

vast differences among transition countries (@ 30) similarities 2 Dimensions of transition Microeconomic market creation and price liberalization firm restructuring and privatization property rights and the legal system Macroeconomic Stabilization (hyperinflation, output, employment)

budgetary finances financial sector reform international trade social safety net 3 Output in transition countries 4 Output in transition countries Country Hungary

Poland Romania Armenia Georgia Russian Federation Consecutive years output decline Cumulative output decline (%)

Real GDP, 2000 (1990=100) 4 2 3 4 5 7 15 6 21 63

78 40 109 112 144 67 29 64 Output decline during the Great Depression (1930-34) France UK

US 3 2 4 11 6 27 5 6 Privatization

7 Speed of transition Big push all at once and painful - all prices liberalized at once - rapid privatization change the system as fast as possible and so it

cannot (before it can) be undone the Washington Consensus - 10 simple policy prescriptions - very controversial Poland, some other CEE countries 8 Speed of transition Gradualism it takes time to change institutions and laws realization that transition is complex sequencing and complementarities experimentation might be warranted

could be reversed (political commitment issues) Hungary, China 9 10 The end of the Soviet Union Gorbachevs ___________ (restructuring) aimed at reforming the central planning system and not replacing it with the market system Boris Yeltsin was supporting a rapid shift toward a market system

___________: Transition to Market replacement of the centrally planned system with private property and liberalized market prices 1991: the SU broke apart Commonwealth of Independent States (CIS) 11 Gaidar reforms (shock therapy) The five pillars: 1. Rehabilitation of the Ruble 2. Market liberalization

decontrolling prices (except energy), free entry into all economic activity, reforming the legal system 3. Privatization 4. Constructing social security net 5. Converting the defense sector 12 Institutional Reforms in Russia Privatization (mass privatization) management led voucher privatization (Anatoly Chubais) privatization for cash (from 1995)

financial-industrial groups (FIGs) bank-led the tax system needed to be started from scratch too complex financial sector a large number of private small banks many banks failed in 1998 (financial crisis) securities market not well developed 13 Evaluation rampant corruption (kleptocracy) worsened income distribution heavily reliant on natural resources (exports) high oil prices helped Russia pay off its debt to

foreign creditors issues with concentration of political power President Vladimir Putin curtailed power of the oligarchs to a degree regional issues with Chechnya 14

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