ECONOMIC TRANSFORMATION

Sabina Hadzibulic, Ph. D. studentsabinica602@gmail.com

Socialist economy

Centrally planned economy (CPE)

Command economy Five-year plan (established in Russia in 1921 for the first

time)

State planning agency (central party & state bodies) Legislature Various economic ministries (for agriculture, electrical

engineering, etc.)

Major problems of centralized (or command) approach to planning:

No new initiatives or passing limits; innate conservatism that led to slow-down of the economy

Centrally determined prices and heavy subsidization of many goods and services

Economy was hierarchically based (individual production and service units – middle bodies (combines, associations, cooperatives, etc.) – economy ministries – state planning agency – central party)

State owns most of the important assets in society (socialization of the means of production), but there were always other types of ownership (collective, private)

Problem of priorities (Soviet competition with America, military expenses, privileging of heavy industry over other sectors, i.e. imbalance between sectors; prioritization of collective goods prevented the development of consumer goods industries)

Case of Yugoslavia (conflicts over the distribution of funds between the republics)

Case of Albania (underdeveloped economy and complete isolation – no external funds or trading agreements)

Economic performance (analyzed by considering economic growth rates over time)

Difficulties with measuring economic growth in socialist countries:

Different method for calculating economic growth in socialist countries (West: Gross Domestic Product>GDP or Gross National Product >GNP; Socialist: Net Material Product>NMP)

Reliability and validity of data (manipulation by authorities, incompetency)

Table 8. 1.

New governments of East and Middle Europe inherited devastated economy that has bankrupt (stagnation, fall of GDP, decrease of living standard, inflation, indebtedness, insolvency, structural crises, unwillingness to adapt)

Complex economic metamorphoses:

Stopping of the inflation

Marketization and privatization

Reconstruction of the economy as a whole (need for the new infrastructure based on modern communication systems, renewed system of transport and economic energy, expended service sector, technologically refreshed industry and agriculture, new competing sectors)

Reforms should start simultaneously

More complex than the political one

No previous experience

No alternative reorganization or transition

Different starting position and various pasts

Methods for the economic transformation:

Shock therapy (or Big Bang approach) – according to the western radical rationalist Harvard economist Jeffrey Sachs

Gradualism – the ones that have not completely denied and rejected communism

Several major components of the transitional economies:

Marketization – opposite of planning, since it allows supply and demand to balance themselves out via abstract forces.

It relates to: pricing (liberation of prices, no more price-setting by

central party, removing subsides in order to make enterprises more price-conscious and efficient, different approaches – Poland, Czecho-Slovakia, Russia – criticism)

competition (taken many forms, refers to subjecting production units to more competition through domestic demonopolization and bigger exposure to the international market – by introducing convertibility)

Privatization – turning state-owned property into private-owned property

No people inside the state with enough capital, skills, experience and will to buy the enterprises from the state

Two sorts of privatization (small - scale, large – scale)

Methods of privatization:

1. Mass privatization programs (2 types)

a. Citizen voucher schemes (government gives the vouchers to the citizens enabling them to acquire shares in enterprises or investment funds OR citizens purchase vouchers from the states)

b. Employee share schemes (employees of a particular enterprise are offered shares in it)

2. Foreign investments programs (3 types)

a. Joint ventures (foreign investors either purchase a share in the existing enterprise OR else invest jointly with the host country in a brand new project; advantages; consequences)

b. Direct foreign investment (foreign investor buys an existing enterprise or finances the establishment of the new one; it can be done in 3 ways: government agency sets the sale price, tender, auction)

c. Diaspora investments

Three further approaches:

1. Extending bank credits (taking ban loans in order to have a share in the investing fund or selling enterprises, paying off with interest; foreign banks when no funds)

2. Direct sell-offs to citizens (tenders, auctions; many suspicious buyers)

3. Restitution of property

Post-communist states usually opted for several of these approaches (some precede others; each state has its own combination; some use radical methods in certain areas, while the others are more gradual, etc.)

Problems of privatization:

Lack of an entrepreneurial culture

Shortage of capital

Sociopolitical reasons

Inadequacy of the legal framework (laws on market economy, laws on the behavior of financial institutions, consumer protection laws, economic regulations-control of prices, etc., laws on restitution)

Priorities (since the private sector is still fragile and emerging,

governments are obliged to intervene in the economy and specify certain priorities; no more spending on defense and hard-industry, governments are not privileging any sector)

Performance

Performance of the early post-communist era is unimpressive (lack of big investments due to the absence or variable legislation on ownership, taxation, restitution, etc.)

Tables

Informal economy (“grey economy” ) in transitional period

Production and distribution of goods and services that is not institutionally regulated (not prohibited, but institutionally/legally unregulated)

Features in the transitional period:

Extended dimensions of informal economy Unusual activity of its participants Different patterns of adjustment of the participants in the institutional

vacuum and economic crises

Table: The share of informal economy (%) in the overall GDP in the selected economies in transition (source: EBRD, Transition Report 1997, according to Cvejic, 2006: 26)

1989 1990 1991 1992 1993 1994 1995 BDP per capita in $ 1995

Belarus 12 15,4 16,6 13,2 11 18,9 19,3 4220Georgia 12 24,9 36 52,3 61 63,5 62,6 1813Kazakhst.

12 17 19,7 24,9 27,2 34,1 34,3 3664

Moldova 12 18,1 27,1 37,3 34 39,7 35,7 2069Russia 12 14,7 23,5 32,8 36,7 40,3 41,6 4480Ukraine 12 16,3 25,6 33,6 38 45,7 48,9 2400Uzbekist. 12 11,4 7,8 11,7 10,1 9,5 6,5 2370Latvia 12 12,8 19 34,3 31 34,2 35,3 3291Lithuania 12 11,3 21,8 39,2 31,7 28,7 21,6 4471Estonia 12 19,9 26,2 25,4 24,1 25,1 11,8 4138Azerbaij. 12 21,9 22,7 39,2 51,2 58 60,6 1665

1989 1990 1991 1992 1993 1994 1995 BDP per capita in $ 1995

Hungary 27 28 32,9 30,6 28,5 27,7 29 6410Poland 15,7 19,6 23,5 19,7 18,5 15,2 12,6 5400Slovakia 6 7,7 15,1 17,6 16,2 14,6 5,8 7320Czech Rep.

6 6,7 12,9 16,9 16,9 17,6 11,3 9770

Bulgaria 22,8 25,1 23,9 25 29,9 29,1 36,2 4588Rumania 22,3 13,7 15,7 18 16,4 17,4 19,1 4312

Croatia: 17,8 – 15, 9% (199o) 19, 4 – 28, 0 % (1991) 21, 7% - 38, 2% (1992) 29, 7 % - 38, 2% (1993) 28, 6% - 37, 4% (1994) 22, 7% - 32, 6% (1995)

Yugoslavia: 31, 6 % (1991) 41, 7% (1992) 54, 4% (1993) 44, 7% (1994) 40, 8% (1995) 34, 5% (1997) 34, 0% (2000)Source: ibid.