Embed Size (px)
Citation preview
1
Overview of Comparative Economics
Chapter I
How do we compare economies?
2
Criteria for Classifying Economies
How do we classify economies?
3
Institutional Mechanisms
Allocation Mechanisms Forms of Ownership Role of Planning Types of Incentives The method of Income Redistribution and
Social Safety Nets Role of Politics and Ideology
4
I. Allocation Mechanisms
What good and services are produced? How goods and services are produced? For whom goods and services are produced?
Production → allocating factor inputs Distribution → allocating produced goods and service
Three basic kinds of allocation mechanisms:
1. Traditional Economy
2. Market Economy
3. Command Economy
5
II. Forms of Ownership
Who owns the means of production? In capitalist economies, land and produced
means of production (capital stock) are owned by private individuals or private firms (Market Capitalism)
In socialist economies the state owns the land and the capital stock (Command Socialism)
6
II. Other Forms of Ownership
Intermediate forms of ownership (like cooperatives or worker ownership)
Under socialism: central government vs local government ownership
Religious groups’ ownership
7
II. Forms of Ownership
Market Capitalism vs Command Socialism United States vs Soviet Union
ALSO Market Socialism vs Command Capitalism Yugoslavia and China vs Nazi Germany
8
III. Role of Planning
Centrally planned economy → planners’ preferences dominate allocative decision-making
Market economy → consumers’ sovereignty dominates allocative decision-making
9
III. Role of Planning
Centrally planned economy is usually correlated with command socialism (Soviet Union, there are exceptions –command without planning → Soviet Russia during 1910s and 1920s)
Market economy is usually correlated with market capitalism (there are exceptions—indicative planning → France and Japan)
10
IV. Types of Incentives
Material Incentives → paying people according to their productivity (their marginal product that maximizes profits for competitive firms hiring labor in such a system) Under capitalism → takes the form of rewards for
entrepreneurship and capital investment as economic profits
Moral Incentives → trying to motivate workers by appealing to some higher collective goal
11
V. Income Redistribution and Social Safety Nets Social Market Economies (or some advanced
capitalist countries) → do their income redistribution through social safety nets
Command Socialist Economies → did not have to redistribute income → their governments controlled the distribution of income by setting wages and forbidding capital or land income
12
VI. Role of Politics and IdeologyCentral controversy Is democracy linked with market
capitalism??? Is authoritarian regime linked with command
economy???
13
VI. Role of Politics and Ideology Friedman “libertarian” laissez-faire → lack of
individual freedom In democracies, social democrat parties exist
(like Sweden) They support income redistribution and extensive
social safety nets They support nationalization and central planning They do not support dictatorship
14
VI. Role of Politics and Ideology Authoritarian political regimes pursued market
capitalism (East Asia and Latin America)
Market capitalism is not a guarantee of political democracy
Islamic Fundamentalism Imposition of an Islamic code-Shari’a It is not a liberal democracy → individual rights and
freedoms are subordinated to a Shari’a and the religious authorities
Economically it does not follow neither capitalism nor socialism
15
Overview of Comparative Economics
Chapter II
Market Capitalism
16
Market Capitalism
Form of Ownership → Most of the time land and produced means of production (capital stock) are owned by private individuals or private firms
Role of Planning → Market capitalism is usually planned by the market (with demand and supply)
Material Incentives → In market capitalism material incentives exist in forms of rewards for entrepreneurship and capital investment as economic profits
17
Market Capitalism
Income Redistribution → is usually done through social safety nets in market capitalism
Role of politics and ideology → Are market capitalist countries mostly democratic? Social democrat parties exist in market capitalist
countries supporting income redistribution, extensive social safety nets, nationalization and central planning
18
Why market capitalism popular? End of communism →most former
communist countries are concentrating on market capitalist economic systems
Predominantly market capitalist economies are making efforts to move toward a purer version of this system
19
Advantages and Disadvantages of Market Capitalist Economies Experienced enormous technological
advances and growth as they underwent the Industrial Revolution in the late 18th century “ability to revolutionize the means of production”
Experienced large macroeconomic fluctuations with serious downturns in the 19th century (unequal distribution of income and increasing concentrations of industrial monopoly power)
20
Pure version of market capitalist system Pure version of market capitalist system does
not exist Closest to the ideal of pure laissez-faire
market capitalism are: Hong Kong Singapore New Zealand
21
Efficiency
Static efficiency → no one in society can be made better off without making someone else worse off resources are being utilized to their best potential
given the existing technology Dynamic efficiency → allocation of resources
over time to maximize long-run sustainable growth technological dynamism destabilizing process of “creative destruction”
22
Theoretical Efficiency of Market Capitalism Efficiency Theorem
The general ability of markets to allocate goods and resources efficiently through the law of supply and demand A complete competitive full-information general equilibrium is efficient
23
Theoretical Efficiency of Market Capitalism Complete
For any good or service that affects someone’s utility, there is a market
Competition There are many buyers and sellers with free entry
and exit There are well-defined homogenous goods and
services No individual supplier has any control over the
price in his or her market
24
Theoretical Efficiency of Market Capitalism Full information
All agents in the economy know everything about consumer preferences, production technologies, and prices
General equilibrium Every single market is in equilibrium in the sense that the
quantity supplied equals the quantity demanded of the good or service
If that does not happen: Surplus Shortage
Partial equilibrium with a few markets being in equilibrium
25
Theoretical Efficiency of Market Capitalism Efficiency
Pareto optimality→ no one in the economy can be made better off without making someone else worse off
If someone can be made better off without making someone else worse off, then the economy is not producing as much as possible of what people want
26
Why is a complete, competitive, full-information, general equilibrium efficient? Adam Smith’s invocation of invisible hand of the
market working across all sectors to allocate goods in a way that maximizes the “wealth of the nations”
He founded classic laissez faire economics He argued that the government should get out of the
economy (minimal government intervention) It is at the equilibrium price that the maximum amount
will be both produced and sold and thus actually consumed by public
27
Invisible Hand
In the free marketplace an “invisible hand” regulates and self-corrects the economy
The market itself will regulate the economy Efficient producers will prosper and the
inefficient producers will lose The public will get the best product for the
lowest price Supply and demand will determine prices
better than any government official can
28
Limits to the Efficiency of Laissez-Faire Market Capitalism Monopoly Power Externalities Collective Consumption Goods Imperfect Information
29
Source of Inefficiency:Monopoly Power Monopoly power prohibits competition Monopolist will maximize profits by setting marginal
cost equal to marginal revenueExceptions: Natural monopoly
Characterizing an industry with economies of scale (declining LRAC) even at level of output equal to total market demand
Technological dynamism More competitive industries will be more technologically
progressive
30
Source of Inefficiency:Monopoly Power Intermediate market forms
Monopolistic competition Many firms, each having some price setting power as a
result of product differentiation Excess capacity theorem
Oligopoly Small number of firms in industry with reaction to any
action taken by others Perfect collusion
Joint-maximizing cartel (OPEC in oil crisis) Longest surviving cartel?
31
Source of Inefficiency:Externalities These are either costs or benefits that are
born by or accrue to an agent other than the agent generating them External costs negative externalities External benefits positive externalities
32
Source of Inefficiency:Externalities External costs are negative externalities,
such as environmental pollution If the firm that generates pollution damages
another industry but does not reduce that damage → the private marginal cost to the firm does not equal the social marginal cost and too much pollution is produced, resulting in inefficiency
33
Source of Inefficiency:Externalities External benefits are positive externalities,
such as technological invention without patent protection for inventors If an inventor has no patent protection, then other firms can
steal her invention and she may make no money even if her invention generates great social benefits
Private marginal benefit to the inventor does not equal marginal social benefit of the invention and too little inventing will occur, resulting in inefficiency
34
Source of Inefficiency:Collective Consumption Goods Consumption goods=public goods → such as
national defense Because of the nature of such goods, it is difficult for
private markets to organize themselves to provide these goods in optimal quantities
The characteristics of pure public good: Nonexcludability of consumption: It is not possible to
exclude this kind of consumption Nondepletability of consumption: Everyone consumes it
simultaneously, and no individual’s consumption reduces any other individual’s consumption Free-rider problem
35
Source of Inefficiency:Imperfect Information Unrealistic to have perfect information When one party in a transaction knows more
than another, special problems arise causing asymmetric information Akerlof “The market for Lemons” Principal agent problem Sub-optimizing behavior
36
Macroeconomic Instability of Market Capitalism The General picture
The major market capitalist economies have been less than perfectly stable over time
There was a general increase in unemployment rates after the early1970s in many countries, associated with a general stagnation of economic growth, that appears to have been reduced recently
The considerable variation in capital investment can be explained by factors Exogenous fluctuations in new technologies that can serve as
the basis for the investment Fluctuations in government monetary policies affecting
interest rates Psychological fluctuations due to the “animal spirits” of those
making investments
37
Macroeconomic Instability of Market Capitalism QUESTION
Why do these variables lead to fluctuations in the unemployment rate, since in a perfectly labor market, wage rates should fall when the demand for labor falls, thereby preventing the emergence of any involuntary unemployment?
TWO DIFFERENT ANSWERS Keynesian School Classical School
38
Macroeconomic Instability of Market Capitalism Keynesian School
Rigidities of various sorts exist in labor markets and that capital investment can collapse and stay down for extended periods of time, as in the Great Depression
The implication is that government intervention through fiscal or monetary policies is advisable to stimulate the economy and to stabilize and smooth out business cycles
39
Macroeconomic Instability of Market Capitalism The Classical School
Deriving from 19th century classical political economists such as David Ricardo
Market capitalist economies are powerfully self-stabilizing
Conscious government intervention merely generates inflation and intensifies fluctuations
To minimize unemployment, unions should be broken up and a stable fiscal and monetary environment should be maintained within a laissez-faire environment
40
Laissez-faire Economic Policies Shift toward supporting more laissez-faire
economic policies There is a tension between asserting the
efficiency of competitive equilibria and recognizing the limits of the applicability of that theorem Chicago School’s (Milton Friedman) argument
draws directly from the efficiency theorem and follows by asserting the irrelevance or unimportance of the various exceptions and limits
41
Chicago School
Markets are almost always efficient, so government should keep its hands off
The most externalities will be resolved by private markets if property rights are properly defined and enforced “free market”
Many of the goods provided by the public sector are not really collective consumption goods and could be more efficiently provided privately
Information costs are inevitable and cannot be avoided The Chicago School supports the Classical School approach in
macroeconomics Friedman is the most prominent advocate of monetarism in the
US With respect to distribution of income, people should be allowed to
keep what they earn from the free market Inequalities are the necessary outcome of providing sufficient
incentives for production, investment and growth
42
Austrian School
They reject equilibrium analysis and emphasize dynamic market processes
Entrepreneurs are the most important agents in the economy They must be allowed to function freely, without
government restriction, so that they can lead the market to evolve in conjunction with the evolution of consumer preferences through process of innovation
Static efficiency is relatively unimportant It is the dynamic success of market capitalism that is its
most important economic feature
43
Overview of Comparative Economics
Chapter III
The Theory and History of Marxism and Socialism
44
Command Socialism
Form of Ownership → Most of the time the state owns the land and produced means of production (capital stock)
Role of Planning → Economy is planned centrally and the planners’ preferences dominate allocative decision-making
Incentive Structure → Moral Incentives-trying to motivate workers by appealing to some higher collective goal
Income Redistribution → The governments control the distribution of income by setting wages and forbidding capital or land income
45
Command Socialism
Role of politics and ideology → Are command socialist economies usually linked with authoritarian regimes? Authoritarian political regimes also pursue market
capitalism Command socialism can also support democracy
46
Socialism
An economic system characterized by state or collective ownership of the means of product, land and capital
Not actually exists as a system until the early 12th century
Its emergence based on criticism of feudal and capitalist systems that existed prior to its modern appearance
Criticism originated from religious sources favoring egalitarian income distributions and collective sharing
Became a secular theory of history and society in the writings of Karl Marx
47
Is Socialism still popular?
With the collapse of Soviet Union and end of communism, nowadays many countries that have identified themselves socialist are attempting to move toward market capitalism
Why examine the socialist economic system? Many are still socialist in actual practice Frustration with efforts to move toward some form of
capitalism have led to a revival of socialist ideology in some of the countries
Difficulties experienced in the market capitalist world have stimulated reconsideration of limited elements of socialist model as reformist devices
48
Development of Socialist Ideology:Religious and Philosophical Precursors It is originated in religious and philosophical criticism
of inequalities in existing societies and the formulation of ideal alternatives in which collective sharing and equality reign supreme
In ancient Greece → philosopher Plato described an ideal society of in his Republic
Christianity provided opportunity for socialism expecting the second coming of Christ → when all would be judged and there would be heaven on earth for the saved (millennium)
49
Development of Socialist Ideology Thomas More “Utopia” described an island
where everyone shared and was equal Enlightenment of 1700 Secularized version of egalitarianism in
French philosophy by Jean-Jacques Rousseau led to French Revolution in 1789 The revolution was against feudal aristocracy and
inequality
50
Development of Socialist Ideology In 1796 Francois Gracchus Babeuf is often
identified as the founder of modern Communism “Conspiracy of Equals” → abolition of private
property and the holding in common land Communism → local units of government in
France are called communes The term socialism originated in the early
1830s with the British utopian socialist Robert Owen
51
The Marxian Worldview
Marxian → refers to the writings and views of Marx himself Marxist → refers to any view or idea strongly influenced by Marx
52
The Marxian Worldview
Karl Marx (1818-1883) was born in Trier in the German Rhineland
Studied philosophy in Berlin Became a radical journalist Participated the uprising of Rhineland Spent most of his life in exile in London Supported financially by his collaborator, Friedrich
Engels, who owned a textile mill Together Marx and Engels developed Marxian worldview in
writings which influenced socialist thought
53
The Marxian Worldview
Marx’s worldview constitutes a holistic system by seeking to explain virtually everything in a unified whole
His holistic theory is his integration of three major strands of 19th century European thought: German political philosophy French political sociology British political economy
54
The Marxian Worldview: The Hegelian DialecticGerman Political Philosophy Hegel developed the idea of dialectic
All phenomena reflect a conflict between pairs of unified opposites whose joint opposition evolves over time to critical breakpoints where reality qualitatively changes
These opposites are labeled as thesis and antithesis
At the critical breakpoint their opposition generates something brand new, the synthesis
55
The Marxian Worldview: The Hegelian Dialectic The ultimate Hegelian thesis is the Universal
Idea → God The antithesis is the individual person The synthesis is the state
The idea of emergent powerful and nationalist German state
These ideas influenced the movement for German unification that accelerated toward its culmination under Bismarck in 1871 and influenced the ultranationalist Nazi movement in the 20th century
56
The Marxian Worldview: Historical Materialism Marx “materialized” Hegel’s dialectic by using the
idea of French Revolution The key to historical materialism → the idea that the
driving force of history is the dialectic between conflicting socioeconomic classes
The class conflict of the emerging industrial society between the bourgeoisie (capitalists) and the proletariat (worker)
The Communist Manifesto starts as “The history of all existing societies has been the
history of class struggles”
57
The Marxian Worldview: Historical Materialism The struggle concerns
ownership controls of means of production
One class owns and controls the means of production and exploits the other class, which does not own and control the means of production
The technology of society → forces of production Combines with the structure of classes → relations of
production To determine the mode of production → the substructure or
base of the society that determines everything else, the superstructure, that is religion, politics, culture and so forth
58
The Marxian Worldview: Historical Materialism The mode of production of ancient Greece and
Rome was slavery, characterized by the struggle between master and slave
The fall of the Roman Empire was a result of this contradiction → resulting in the mode production transforming from slavery to feudalism
In turn, feudalism was driven by the struggle between lord and serf and was transformed into capitalism
In capitalism, the struggle is between the capitalist who owns the means of production and the workers who does not
59
The Marxian Worldview: Historical Materialism As this struggle reaches its peak in the most
advanced capitalist countries such as England and Germany, there would be a revolutionary transformation into socialism with state ownership of the means of production direction of a production by a common plan,
income inequalities and wage payments control by a dictatorship of the proletariat
60
The Marxian Worldview: Historical Materialism Marx claims
Once socialism is accomplished, communism would eventually develop
All classes and property ownership would disappear
The state would wither away
61
The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism Ricardo’s labor theory of value
The value of a commodity is determined by the amount of socially necessary labor time it takes to produce it
Contradicts the neoclassical economic theory that value is determined by supply and demand, with capital contributing to the supply side
62
The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism Land and capital as productive but not as
contributing to value Capital goods as being the product of past labor,
indirect labor
Core of Marxian doctrine The true reality of capital was not the capital
good itself but the social relation of exploitation between the capitalist and the worker
63
The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism The value of commodity (W) = c+v+s
Constant capital (c) fixed capital stock as measured in the labor time required to produce it
Variable capital (v) the value of labor power used in production that is the amount of socially necessary labor time it takes to reproduce labor, equal to subsistence wage
Surplus value (s) value created by the worker but taken by the capitalist, leading to exploitation “Marx’s modification of the labor theory” Marx concentrated on the “surplus value”- profit
64
The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism Capitalist → capital investment → raising the organic
composition of capital c rises while s and v are constant → the rate of profit
declines The fundamental tendency of capitalism
Increase the rate of exploitation → by lowering wages or by working longer
The class struggle and the commercial crisis Concentration of capital in fewer hands and proletariat
becomes more miserable Eventually the contradiction between the forces of
production and the relations of production becomes so intense that the system is overthrown by the revolutionary working class
65
Controversies in Socialism: Theory of Imperialism Capitalism had succeeded in transforming itself into
imperialism, expanding overseas into colonies to exploit their raw materials, cheap labor and new markets
The domestic market could not absorb what the capitalists produced, so they found overseas markets
With the enormous profits capitalist made from their colonies, they started paying off their working class → this changed this class into reformists rather than revolutionaries
66
Controversies in Socialism: Marxism-Leninism Vladimir Illich Ulyanov known as Lenin developed
the Imperialism thesis Lenin noted that imperialism was expanding
unevenly The revolution would come in capitalism’s weakest
link, Russia Industrialized too late to participate in the conquest of
Africa Dominated by foreign investment from the leading capitalist
powers like Great Britain, France and Germany
67
Controversies in Socialism: Marxism-Leninism Refocusing revolutionary expectations on
less developed countries became Marxism-Leninism, the official Soviet doctrine after 1917
It also became the guiding light of Marxist revolution in the 20th century in less developed countries from China to Cuba and to Vietnam
68
Some Divisions of Socialism since 1917 Trotskyism Titoism Maoism
69
Some Divisions of Socialism since 1917: Trotskyism Leon Trotsky, founder of the Red Army in the
Soviet Union, was Stalin’s chief rival for power after Lenin’s death in 1924
He was exiled in 1927 and founded the Fourth International, which fragmented into factions after his assassination in Mexico in 1940
70
Some Divisions of Socialism since 1917: Trotskyism Trotsky and Stalin agreed about the need for
rapid industrialization, but they disagreed whether this should be done in isolation or in an international context
Trotsky supported the idea of an international permanent revolution, believing that true socialism could not be achieved in the Soviet Union without an international revolution
71
Some Divisions of Socialism since 1917:Titoism Marshall Tito led Communist partisans in
throwing the Nazis out of Yugoslavia during the Second World War, with little assistance from Soviet Red Army
A strong Stalinist Tito broke with Stalin in 1948 and declared political independence of Yugoslavia from Soviet influence
72
Some Divisions of Socialism since 1917: Titoism Tito developed a distinctive economic system
for Yugoslavia → worker-managed market socialism
State-owned enterprises in a one-party state operating with little central planning and with managements appointed by worker selected boards
After Tito’s death in 1981, the economic system in Yugoslavia deteriorated and eventually collapsed
73
Some Divisions of Socialism since 1917: Maoism In 1949 a Communist insurgency led by Mao
Zedong took power in mainland China Rural guerilla movement that encouraged
egalitarian economic development in zones of revolutionary control
Imitated the centrally planned command industrialization model of Stalin
More emphasis upon rural agricultural development, egalitarianism, the use of moral incentives
74
Some Divisions of Socialism since 1917: Maoism In the Great Proletarian Cultural
Revolution (1966-1969), Mao emphasized industrial decentralization complete communalization of agriculture total egalitarianism moral incentives
After Mao’s death in 1976, a decline of support in his ideas
75
The Theory of Economic Socialism The Socialist Planning Controversy The Theory of Command Socialist Central
Planning The Participatory or Cooperative Alternative
76
Theory of Economic Socialism:Theory of Command Socialist Central Planning Central planning first appeared in Soviet
Russia with the 1920 electrification plan Indicative planning instituted for heavy
industrial sectors under state ownership such as electricity, steel and cement
Long-term planning was on a five-year time horizon
77
Theory of Economic Socialism:Theory of Command Socialist Central Planning Five year plans were broken down into one-year
plans from which monthly quotas for individual firms were derived
Each firm had a technical-production-financial plan that specified output quantities and prices input quantities and prices including wages levels and kinds of capital investment
One year’s overall general plan generally involved minor modifications of the previous year’s plan based in the outcome of that plan
78
Theory of Economic Socialism:Theory of Command Socialist Central Planning For the first five-year plan, the material balances
were based on the inherited structure of production Figure out
how much of which final goods were to be produced the amounts of all the inputs required to produce those
outputs the inputs to produce those inputs
If a commodity was in “deficit” then either one of the three previous mechanisms would be drawn on or greater efficiency in its production would be induced or demand for it had been cut back
79
Theory of Economic Socialism:Participatory or Cooperative Alternative Also known as the labor-managed
economy-Yugoslavia is the example Market Socialist System → state owns the
means of production Characterized by workers’ ownership or
workers’ management Combination of capitalism and socialism,
constituting a Third Way
80
Theory of Economic Socialism:Participatory or Cooperative Alternative Workers will manage the firms There will be income sharing Productive resources are not owned by the
workers → workers enjoy usufruct rights to the fruits of the operation
Market economy → Any kind of planning is indicative planning rather than of the command sort
Workers can freely choose where to work
81
Transition from Socialism to Capitalism Transition from command socialism to market
capitalism requires replacement of command economy with market
mechanisms in decision-making privatization of state-owned enterprises to move
from socialism to capitalism liberalization of the political system
82
Transition from Socialism to Capitalism In adopting markets rather than command
Freeing prices from central control was the easiest thing Macroeconomic stabilization was more difficult to achieve
as sudden freeing of prices led to inflationary outburst Total output declined sharply with unemployment rising Establishment of the institutional framework that allows for
the open and stable functioning of markets is difficult Developing banking, financial and accounting systems A proper competition policy Laws of corporate governance and bankruptcy Opening to trade and investment Foreign currency convertibility
83
Transition from Socialism to Capitalism Problems of privatization
Restructuring of enterprise management is more important than privatization
Countries that privatized quickly ran into serious problems (Russia and Czech Republic) compared to those that privatized more gradually (Poland and Slovenia)
Privatized firms in transition countries exhibit greater productivity that state-owned ones
The emergence of social problems as countries fell into deep recessions with high inflation and institutional instability
84
Varieties of Advanced Market Capitalism
Chapter V
The United States of America:
The Market Capitalist Leader
85
World’s Largest Economy
Not only the prime example of market capitalist economy but is technological leader of the world with very high per capita income
Its important role in developing distinctive institutions of market capitalism, such as modern corporation
From a nearly pure laissez-faire economy in the mid-19th century has become a mixed economy, but still laissez-faire oriented
The “darker side” of market capitalism, with relatively high levels of income inequality and poverty
86
World’s Largest Economy
Oldest constitution of any nation on earth 1787
Well established private property allowed the market capitalist economy to function flexibly
Greatest crisis and conflict was over the slavery system that divided the industrial North from the cotton-growing South
Civil War of 1861-1865
87
World’s Largest Economy
Leading in technology with the emergence of the American system of interchangeable parts and standardization during the early 1800s
Innovator in economic institutional structures and organizational forms
The key organization of the modern world economy → industrial corporation whose standard form emerged in the railroads
88
World’s Largest Economy
Fordist assembly line production US automobile industry → modern multidivisional
corporation → General Motors Corporation
Mass production with rapidly rising productivity
Institutional foundation of modern American macroeconomic policy established in 1913 Federal income tax and the establishment of the Federal
Reserve System
Development of a strong financial system
89
World’s Largest Economy
After WW I displaced Great Britain as the world’s leading financial power but avoiding a global role
Isolationist attitude → refusal to join the League of Nations in 1920
The Great Depression of the 1930s and the presidency of Franklin Roosevelt → expansion of the federal government’s role in economy moving away from pure laissez-faire
90
World’s Largest Economy
Change in attitudes with WW II
Took the lead at the Bretton Woods Conference (1944) Washington D.C became the headquarters for the new
postwar global economic institutions → IMF, World Bank New York City → UN (successor to League of Nations)
The General Agreement on Trade and Tariffs (GATT) in 1948 → tariff-reducing negotiations and moves to expand international trade
Establishment of World Trade Organization (WTO)
91
World’s Largest Economy
1980s → a period of deregulation of the US economy
US leadership of the word economy challenged by other countries, especially Japan
The stagnation of Japanese economy after 1990
New Economy high technology development in US in late 1990s, led by the information technology sector → reasserted its primacy position
A speculative bubble in the US stock market that peaked in early 2000 and high-tech sector has been in slowdown since
Recession of 2001 → terrorist attacks
92
Historical Development of the US Economy: Growth and Reform By the end of the 19th century → the world’s largest
aggregate economy with rapid growth and industrialization Expansion of railroads Development of the new corporate industrial organizational
form
Major technological innovations Light bulb by Thomas Edison → General Electric
Corporation Telephone by Alexander Graham Bell → AT&T
Establishment of a strong patent system
93
Historical Development of the US Economy: Changing Trends Rapid economic growth in the 1960s and early 1970s
dramatically slowed down after the first oil price shock in 1973
US economy only managed to recover in the late 1990s with high-technology boom after inflation was brought under control
The Soviet Union, America’s greatest postwar ideological and military rival, ceased to exist in 1991
Japan, America’s greatest economic rival, went into severe economic stagnation after 1990
America’s high-tech sector emerged in the 1990s
94
Basic Ingredients of the American Economy: Natural Resources Labor Manufacturing and Investment
95
Basic Ingredients of the American Economy: Natural Resources Rich in mineral resources
Fertile farm soil
Fortunate to have a moderate climate
Has extensive coastlines on both the Atlantic and Pacific Oceans and Gulf of Mexico
Rivers flow from far within the continent
Has Great Lakes → provide additional shipping access
96
Basic Ingredients of the American Economy: Labor Steady growth in the labor force → led to constant
economic expansion
Until shortly after World War I, most workers were immigrants from Europe, or African Americans
Beginning in the early 20th century, many Latin Americans immigrated
They were followed by large numbers of Asians
97
Basic Ingredients of the American Economy: Manufacturing and Investment In US, the corporation has emerged as an
association of owners, known as stockholders, who form a business enterprise governed by a complex set of rules and customs
Through the stock market, American banks and investors have grown their economy by investing and withdrawing capital from profitable corporations
98
The American Corporation:Nature of the American Corporate Form America’s most important contribution to the world economy has
been its development of the organizational form of the modern corporation
Anglo-American Corporate Form that is different from those found in Japan, Germany and other nations Distinct internal hierarchies and divisions Led by strong and highly paid chief executive officers (CEOs) With relatively little control by banks, other firms, workers, and
government Ownership is by stockholders Tendency in recent years to make CEOs or other top managers part
owners by giving them stock options as part of their compensation Reduces the principal-agent problem arising from the separation of
ownership and control in large
99
The American Corporation:Nature of the American Corporate Form In 1819 the doctrine of the juridical identity of
the corporation as effectively a legal person distinct from its owners
The emergence of the limited liability corporation, whose finances were legally distinct from those of the owners of the corporation
100
The American Corporation:Regulation and Deregulation The rise of American corporations generated a broad movement to
restrain their power and perceived excesses
This began in 1887 with the establishment of Interstate Commerce Commission (ICC) to regulate the rates charged by railroads
Anti-trust regulations started after the passage of Sherman Act of 1890
Federal Reserve System regulated the banking system after 1913
Civil Aeronautics Board regulated airfares and airline routes
Federal Communications Commission regulate allocation and the use of the radio spectrum
101
The American Corporation:Regulation and Deregulation Monopolies are allowed in certain industries
that were subject to rate regulation AT&T in telephone industry Electric utility industry
During 1960s focused on safety and environmental concerns Monitoring food and drug safety Consumer product safety
102
The American Corporation:Regulation and Deregulation As the 1970s proceeded, movements to reduce regulations arose:
The first deregulation is to deregulate the airline fares and routes (The CAB was eliminated in 1983)
The ICC was eliminated in 1996
In the early 1990s the FCC moved to auctioning of spectrum rights
EPA moved to the use of marketable pollution emission permits, notably for sulfur dioxide
Long distance telephone industry AT&T
The deregulation of the electricity supply industry
103
Prospects and Problems of the American Economy
The Problem of Poverty and Inequality The overall time trend of inequality
There was a gradual trend toward greater equality from the late 1920s
Increased dramatically during WW II Continued until the mid-1970s After the trend reversed and inequality has since tended to
increase
The role of government in these trends Transfer payments rising Social security for elderly Transfer payments to low income groups have raised
104
Prospects and Problems of the American Economy
The Rise of the New Economy Second half of the 1990s
A steady decline of the unemployment rate Low inflation Decline in poverty Acceleration in the economic growth rate Increase in rate of productivity
The accumulated impact of computerization and the spread of new technologies as the internet
105
Prospects and Problems of the American Economy
The Mass Consumption Society and Its Sustainability
High levels of consumption
Luxury fever “never ending pursuit of more and more expensive luxury goods”
Low savings rate and high personal debt/income ratio
US become its largest net debtor by the mid-1990s
106
Back and forth: From laissez-faire economy to government’s intervention in economy and back to laissez-faire During much of the 19th century, US was almost a
purely laissez-faire economy In the 20th century, role of federal government
increased on various stages: Progressive Era Reforms of 1901-1909 New Deal of 1930s Great Society initiatives of the 1960s
Since 1960s US economy has experienced deregulation and other moves back to laissez-faire (although 1/3 of the economy is directed by some level of government)
US definitely has a mixed economy despite its strong orientation to market capitalism
107
Conclusion: The United States of America: The Market
Capitalist Leader The world’s most dynamic and flexible society and
economy Immigrants from an increasingly diverse array of nations Established institutions of contract and property Evolving corporate forms, patterns of standardization
and mass production A tradition of entrepreneurship Technologically leadership based upon basic science
and solid R&D within a financial and institutional framework
The darker side of market capitalism with high levels of income and wealth inequality
108
Varieties of Advanced Market Capitalism
Chapter VI
Japan: A Planned Market Economy
with Traditional Elements
109
Japan As a New Traditional Economy? Experienced the most rapid rate of sustained
economic growth in the world
Maintained low unemployment and inflation rates and a greater degree of income equality
Leading many areas of technology
110
Japan As a New Traditional Economy? Have large trade surpluses resulting in the
largest accumulation of foreign reserves
Number One? → stagflation in 1990s
Its conflicts with other nations on trade issues threatened to push the world economy into a trade war and depression
111
Japan As a New Traditional Economy? Debates about the basis of Japanese
success Advocates of government economic intervention
argue that bureaucratic guidance through indicative planning and industrial policy has been key to its success
Advocates of laissez-faire argue that these have been more a hindrance than a help, with the most dynamic sectors ignoring the government bureaucrats
112
Japan As a New Traditional Economy? A mixture of structures and systems unique in the
world
A market capitalist economy
The government engages in indicative planning and exerts significant influence
The first society of non-European origin to carry out industrialization and modern economic growth
113
Japan As a New Traditional Economy? Succeeded in adopting foreign technologies and
practices without giving up its indigenous culture
Late 19th century slogan “Japanese spirit and Western ability”
Familistic groupism of Japanese society → a feudalistic holdover
Harmonious labor-management relations and government-business relations
Planned market capitalism with strong traditional elements
114
The Microeconomic Foundations of The Japanese Economy The “Three Sacred Treasures” of Labor-
Management Relations
The Japanese Firm and the Keiretsu System
Managerial Decision Making
Industrial Policy by Government
115
The “Three Sacred Treasures” of Labor-Management Relations Highly educated and well-motivated labor force
Many quality-and productivity-improving innovations suggested by workers on site
Three sacred treasures: Lifetime employment Seniority-based wages Enterprise unions
116
The “Three Sacred Treasures” of Labor-Management Relations Japanese labor
Intra-enterprise job rotation by multifunctional workers On-the-job firm-specific training Bonus payments Compensation flexible Contracts negotiated annually Employment stable Large severance payments at retirement but few
pensions Dualism
117
The “Three Sacred Treasures” of Labor-Management Relations: Lifetime Employment The key to stimulating loyalty and drawing forth
innovative, productivity-improving suggestions
Limited to about 30 % of the labor force, mostly educated men in large firms that must retire at age 55 with large severance payments and assisted in getting other jobs in smaller firms
Japanese workers more likely to stay with a single firm for a longer period of time, even in small firms
118
The “Three Sacred Treasures” of Labor-Management Relations: Lifetime Employment Depending on
Stability of employment
Rapid growth of the economy between 1945 and 1990
Synchronized annual negotiating system
Bonus system → a form of profit sharing
119
The “Three Sacred Treasures” of Labor-Management Relations: Lifetime Employment Development of firm-specific human capital by
rotating workers from job to job within the firm
Workers know all about the firm but lack skills that are transferable to other firms
On-the-job training of blue-collar workers → but white collarization in larger firms
Greater loyalty to firm → Confucian code Firms more willing to engage in firm-specific training if they
believe workers will remain for a long time
120
The “Three Sacred Treasures” of Labor-Management Relations: Seniority Wages Confucian view of respect for elders
Steeper age-wage profile for blue-collar
Seniority wages reinforcing loyalty to the firm among lifetime employees
Expectations of performance-based pay
121
The “Three Sacred Treasures” of Labor-Management Relations: Enterprise Unions If one is committed for life to a specific company One has been working at several different jobs with the
company, thus not being tied to a particular skill or craft → it is logical to belong to a union that negotiates directly
with that company and only that company
Stability of labor-management relations
“Happy family of the firm”
Critics “Inefficiency”
122
The Japanese Firm and the Keiretsu System The existence of interlocked associations of firms →
keiretsu
Horizontal keiretsu Revivals of the prewar zaibatsus (single holding
companies) Firms in different industries all linked to a common bank
and trading company maintaining their formal independence
Vertical keiretsu A set of suppliers and distributors linked to a major
industrial producer by long-term contracts
123
The Japanese Firm and the Keiretsu System Toshiba Corporation
At the center of a vertical keiretsu including distributors, suppliers and suppliers of direct suppliers
A member in Mitsui horizontal keiretsu
124
The Japanese Firm and the Keiretsu System Horizontal keiretsus practice three sacred
treasures of labor-management relations
Peripheral firms in vertical keiretsus tend not to do so
Keiretsus → cross-holding of stocks In horizontal form → much stock ownership by the
bank and a large proportion of loans from the bank
125
The Japanese Firm and the Keiretsu System Network externalities
Group membership may have a negative impact on profitability relative to independents run by founder-entrepreneurs
Vertical keiretsus may achieve efficiencies because their stable long-term contracts allow for just-in-time delivery, kanban system that minimize inventory costs and encourage superior quality control
126
Managerial Decision Making
J-mode depends on both long-term relationships between workers and firms and long-term relationships between banks and firms which tend to hold for keiretsu members with lifetime employment systems
Top managers risen from within the firm increase the loyalty Management as the representative of the employees Labor-managed firms
127
Managerial Decision Making
Horizontal coordination through processes of consensual decision making
Dependence upon workers for suggestions for improving the firm’s performance
Seniority-based rank hierarchies
Given long-term nature of employee-firm relations and of bank-firm relations, managers use longer time horizon for strategic planning
Emphasis upon maximizing market share subject to minimum profit constraint, rather than maximizing short-run profits
128
Industrial Policy by Government Government-business relations labeled industrial
policy
Ministry of International Trade and Industry (MITI)
The state being the driving force of the Japanese economy → supremacy of government bureaucrats
High-level bureaucrats to high-level employment in top firms
129
Industrial Policy by Government MITI intervention in markets → product
cycles Beginning stage of an industry
Infant industry tariffs Subsidies for special capital investments Rationalization cartels that carry out MITI-financed
R&D At the end of product cycle
To reduce closeout using depression cartels
130
Industrial Policy by Government Overall rapid growth Export success of targeted industries
Shipbuilding, steel and computers MITI failed in the late 1950s to cartelize the
automobile industry down to two firms Honda → the most technically innovative of the
automobile companies and a great export success
Sony → rejected to produce transistor radios Both founded and led by strong-willed entrepreneurs
operating outside of the planning and keiretsu system
131
Why Japan Failed to Become Number One
Macroeconomic Performance High rate of growth
High capital investment rate backed by a high savings rate
After bursting of the Japanese stock market bubble in 1990 Growth rate fell below those of other leading market
capitalist economies with unemployment rate increasing
132
Why Japan Failed to Become Number One High savings rate
Confucian ideals High growth rates as consumption increases lag behind
income increases Individuals save to make down payments on homes Workers save for old age because of the combination of
early retirement with low pensions and low social security payments
The lumpiness of large bonuses No capital gains tax except on land Most of the postwar period, a relatively young population
But rapidly aging population
133
Why Japan Failed to Become Number One
Macroeconomic Planning Policy Market capitalist economy with elements of a traditional economy
and indicative planning Sectoral and technological planning → MITI Macroeconomic plans → Economic Planning Agency (EPA)
Relatively low levels of government spending and taxation
Low level of social transfer payments
Low defense spending, due to US demilitarization
134
Why Japan Failed to Become Number One
Quality of Life The highest quality of life
Top in life expectancy
Gender empowerment, (31st)
High per capita income and consumption
Low crime rate
135
Why Japan Failed to Become Number One One of the more equal income distributions in the
world Egalitarian wage structure arising from the labor-
management system Workaholics in rabbit hutches
Environmental pollution
Problems of discrimination (against women and foreigners)
136
Why Japan Failed to Become Number One
The End of the “Economic Miracle” Rising dependency ratios that reduce savings
Opening of financial markets caused by deregulation, leading to outflows of capital
Technological stagnation
Weakness of the non-tradeable goods sector
The failure of government spending to stimulate the economy
137
Why Japan Failed to Become Number One Hollowing out of the industrial base as large
corporations invest in other countries
The emergence of a liquidity trap in financial markets
A decline in the rate of return to capital investment owing to overinvestment in the past
A credit crunch caused by the accumulation of bad loans in the banking sector
138
Why Japan Failed to Become Number One A general disruption of the financial sector in the
aftermath of the collapse of the stock market
Deeper cultural arguments involving a breakdown of Confucian values
Saving-investment nexus Rapidly aging society, experience rising dependency ratios
that tend to depress the savings rate A victim of its own success as a society able to support
long life
139
Why Japan Failed to Become Number One In early 1990s, a low rate of return for large
corporations resulting from overinvestment
After 1997 Asian financial crisis, credit problem
The collapse of the bubble economy
Technological leadership?
140
Variants of Transition among Former
Socialist EconomiesChapter X
The Former Soviet Union:
The Myth and Reality of the Command Economy and Russia’s Economic Transition
141
Transformation of Russian economy in 1990s Centrally planned economy was replaced by
an economy operating on the basis of market forces and private property
Some of the former communist states of Central Europe began their process of economic transition earlier
142
Historical Background of The Soviet Economy: Until December 25, 1991 USSR was the largest country in the world
Occupied 1/6th of the earth’s inhabited land
293 million population (third largest in the world)
128 ethnic groups
143
Historical Background of The Soviet Economy: Russian Empire before 1917 Intermediate case compared to underdeveloped
Asia and to industrially developed Western and Central Europe
Duality between traditional agriculture and military-driven industrial development
This duality produced undecided attitudes toward change and reforms: Change is seen as industrialization at the expense of agriculture
144
Command Economy:Launching the Model Several economic subsystems coexist that ranged
from Self sufficient communes with mostly barter exchange
Individual small-scale proprietorships
Medium-sized businesses that produced for markets with the use of hired labor
Also publicly owned large-scale enterprises (mostly in heavy industries) that by nature were socialist prototypes using direct administrative allocation of resources and assigned labor
145
Command Economy:Launching the Model This economic pluralism produced political break in
the ruling Communist Party
Leon Trotsky, founder of the Red Army in the Soviet Union, was Stalin’s chief rival for power
Advocated super-industrialization in the Soviet Union that would lead to a worldwide permanent communist revolution
Call for liberalization of domestic and international markets
146
Command Economy:Launching the Model
Divisions between Trotsky and Stalin Trotsky and Stalin agreed about the need for
rapid industrialization, but they disagreed whether this should be done in isolation or in an international context
Trotsky supported the idea of an international permanent revolution, believing that true socialism could not be achieved in the Soviet Union without an international revolution
147
Command Economy:Launching the Model Stalin supported an autarkic model of socialism in
one country
Exterminated his opponents (Trotsky) in the party
Established his own cult
Reasserted economic traditionalism in the guise of revolutionary socialism
148
Command Economy:Launching the Model Implementing socialism in one country
required speedy industrialization For self-sufficiency
Military Buildup
Social transformation from a relatively backward agro-industrial economy into an urban industrial one ordered by the political center
149
Command Economy:Launching the Model Disallowed market allocation of resources
State monopolized foreign relations
Closed the economy through restrictions on foreign trade, currency inconvertibility, and limited trade specialization
Accelerated industrialization, which favored producer and military goods at the expense of agriculture, assumed unbalanced economic growth
150
Command Economy:Launching the Model Super-industrialization favored the teleologists
that asserted the need for long-run plans and opposed market forces
First Five-Year Plan in 1928 Central comprehensive planning Ensured political control over the diverse republics Grouping them into economic regions to meet
nation-wide production needs
151
Command Economy:Launching the Model Prioritize industry over agriculture for sociopolitical
reasons
Emphasize on regional specialization
Deemphasize republic-level diversification
Establish state monopolies in key industries
Eliminate the entrepreneurial subsystems alien to socialism
152
Command Economy:Launching the Model Agricultural collectivization
Forced collective ownership on peasants as a stepping stone to comprehensive public ownership
Success of industrialization program turned out to be a disaster for agriculture
An over-industrialized and over-urbanized economy with an inadequate and no longer self-sufficient agricultural sector
153
Command Economy:Soviet Central Planning: The Beginning The goal of First Five-Year Plan was to catch up
with capitalist industrial countries
Success of the initial industrialization push attributed to central planning accomplished at cost of forced collectivization and a major decline in living standards The share of private consumption declined
Concentrated investment in growth-supporting sectors based on domestic savings
154
Soviet Central Planning:Implementation Planning versus market
Planning is concerned with expanded reproduction and particular investment, with consumption deemphasized Soviet planning → Prioritized investment to catch
up with the West industrially and militarily Ignored static efficiency in favor of high rates of economic
growth
155
Soviet Central Planning:Implementation Prices were used by planners to ensure compliance with
plans and continuous control over plan implementation
Domestic prices were distorted because they reflected planners’ priorities in distribution and production rather than relative scarcities
Pricing disabled rational decision making by producers
The planners used wholesale prices to balance inter-sectoral outputs and to provide for comparison of alternative production mixes based on different technologies
156
Soviet Central Planning:Implementation In agriculture, government procurement prices
designated quotas promoted specific crops, individual regions and financially controlled collective farms
Retail prices produced inequality in income distribution
Two policies to solve: Free provision of public goods (health care and education) Low prices for mass consumption goods (food, housing,
transportation) while raising prices for luxury goods
157
Soviet Central Planning:Implementation The gap between sticky prices and scarcity values
increased over time and lowered the effectiveness of planning
The planned creation of a socialist market where efficiency of production rose with diminishing inequality in income distribution failed Success in creating a second economy where market
forces partially corrected artificial shortages
158
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model Surviving agricultural producers:
State Collective Private farm
Stalin’s industrialization was dependent on the mass collectivization of peasants and the elimination of the well-off peasants (kulaks)
159
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model The collective farm (kolkhoz)
A pseudo-cooperative, with elected management ensuring a supply of agricultural goods to the state at minimum cost
The income of peasants at subsistence level maintained by household plots and individually owned livestock
Exploited by paying low procurement prices and by overcharging for state-owned tractors and machinery
Not have guaranteed wages and were paid in labor days Payments were arbitrary and variable depending on
regions, seasons and specific farms Consumer goods sold to kolkhozes at high prices
160
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model The state farm (sovkhoz)
Factories in the fields and were run under more favorable policies
If underpaid, compensated by subsidies State employees and got a guaranteed wage Have access to better inputs at wholesale prices
161
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model The individual farmer
Found in private sector Land in auxiliary household plots not privately
owned and cultivated only by peasants and state employees
Livestock was privately owned but usually pastured on collective or state land
Individuals worked on these plots for themselves and owned their produce but also worked for collective or state enterprises
162
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model The collective farm (kolkhoz) versus the
state farm (sovkhoz) Their coexistence served the sociopolitical goal of
crowding out entrepreneurship A decline in productivity and in absolute
production On collective farms because of price discrimination and
compulsory deliveries On state farms because of subsidization
163
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model Agriculture deprioritized resulting in
dependence on grain imports
The increasing role of imports of agricultural products and other goods inspired reforms in export sector and the overall economy
Raising questions about maintaining itself as a closed economy?
164
Soviet Central Planning:Closed Economy: Command Trade Isolationism Its ideological underpinning is an autarkic
socialist country encircled by hostile imperialist countries
The anarchy of world markets could undermine the effectiveness of central planning
Domestic firms were protected from foreign competition and world prices
165
Soviet Central Planning:Closed Economy: Command Trade Isolationism State authority over foreign trade and foreign currency
transactions through state monopolies
Planners determined imports and exports by balancing domestic inputs with projected outputs and making up for potential discrepancies
Export production derived from the need to pay for imports
Producers of exportable goods did not have direct relationships with foreign buyers but dealt with foreign trade bureaucracies organized at the industrial level
166
Soviet Central Planning:Closed Economy: Command Trade Isolationism Foreign trade relations bilateral and highly politicized
The use of trade for greater integration with the socialist satellites through Council of Mutual Economic Assistance (CMEA or Comecon) founded in 1949
As a multilateral body to persuade these countries to adopt a uniform strategy of communist industrialization with the USSR
CMEA membership → USSR, Czechoslovakia, Hungary, Poland, East Germany, Romania, Bulgaria, Albania (withdrew in 1961), Mongolia, Cuba and Vietnam joined later, Yugoslavia as an associate member
167
Soviet Central Planning:Closed Economy: Command Trade Isolationism Two principles:
Extensive development that prioritized capital goods at the expense of consumer goods
An autarkic focus on import substitution and minimal dependence on western markets
CMEA countries dependent on soviet energy resources and raw materials
The idea of socialist international division of labor suggested intra-industrial rather than inter-industrial specialization
A collective isolationism from world markets and a tendency to create a socialist alternative to international capitalist trade
168
Soviet Central Planning:Closed Economy: Command Trade Isolationism Intra-CMEA specialization acknowledged the benefits of trade
for economic development
The international socialist division of labor was shaped by concentrated planning rather than markets
The problems of inefficiency and non-competitiveness of individual national industries increased in the mid-1960s, leading to declining intra-bloc trade
Liberalization of trade with the West brought about by technological backwardness in the course of the arms race
Decade of trade promotion ended in 1979 with the Soviet invasion of Afghanistan
169
The Reform Cycle:Reluctant Reform Thinking Soviet economy characterize pervasive protectionism
Enterprises were shielded against bankruptcy through centralized subsidies
No financial discipline and managers’ performance assessed on basis of compliance with the government’s plans
People were protected against economic fluctuations and the possibility of unemployment
The state monopoly of foreign trade protected domestic firms from external shocks and from competition with foreign goods
The network of commodity flows with preset prices and quotas created a sense of certainty in domestic trade
THIS ECONOMIC STABILITY LACKED ANY IMPETUS TO CHANGE
170
The Reform Cycle:Reluctant Reform Thinking Reform and reformism unacceptable and interpreted as
dangerous Western imports
The strengths of Stalin’s economic model → Mobilization of resources for industrial catch-up Development of a military-industrial complex The postwar recovery through extensive growth
The weaknesses of Stalin’s economic model → Undervaluation of the opportunity cost of planned priorities
absent appropriate criteria to assess economic performance Protectionism downplaying economic incentives Vertical institutional structure producing shortsighted
bureaucracies and compartmentalism
171
Legacies of Soviet Economy
State-planning for state-owned industries and demand structuring by the state budget
State-determined monetary policy with a one-tier banking system
State-run monopolistic firms, producing a narrow range of goods at state-administered prices and facing monopolistic suppliers
Risk-aversion by managers who were reluctant to innovate
Full-employment guarantee and as a consequence, the systemic impossibility of firms going bankrupt- a soft-budget constraint policy
State monopoly in foreign trade, administered prices and exchange rates reflecting the inconvertibility of the domestic currency
Fiscal revenues generated by turnover taxes and mandatory transfers of profits used to subsidize firms
172
Problems with Legacies of Soviet Economy Monopolistic producers and risk-averse managers
lacked the motive to innovate
Full-employment guarantees hidden unemployment and favor labor-intensive production processes
Domestic production is not exposed to international trade and therefore, becomes non-competitive
State provision caused the creation of poor quality of public goods
173
Slowdowns and Stagnations
Slowdown in growth rates from the mid 1970s
Economic stagnation in 1980s
Central planners’ inability to deal with a complex, over-industrialized economy’s need for constant adjustment
A succession of reforms failed to improve central planning, was unsuccessful in questioning state ownership
Late 1980s → legal recognition of private enterprise ranging from introduction of cooperatives to individual proprietorships
174
Collapse of the USSREstablishment of Russian Federation After the collapse of the USSR in December
1991, the Russian Federation faced the demanding need for moving away from Centrally Planned Economy
Boris Yeltsin, the first democratically elected president of Russia, launched the sixth reform to undo the legacies of Soviet model
175
Transition in Post-Soviet Russia:Boris Yeltsin (1991-1999) Destroyed of Communist Party’s monopoly
politically and economically
Failed to build a new pluralist society
Finished off the remnants of command economy system
Yeltsin took great steps toward developing a market economy: Price liberalization Mass privatization of state enterprises Foreign trade liberalization Introduction of full convertibility of ruble
176
Transition in Post-Soviet Russia:Problems with Yeltsin’s Reforms Price and foreign trade liberalization created high inflation and
decline in domestic production
Mass privatization was accompanied by political rhetoric, contrary to the West’s economic emphasis on the fundamental importance of private property for the institution of a market economy
Voucher privatization forced negotiations in the regional implementation of privatization
Several local elites succeeded in seizing formerly state-owned enterprises
Local established elites continued to exercise their power
177
Transition in Post-Soviet Russia:Problems with Mass Privatization By the end of 1995, Russia had completed the privatization of
over 120,000 enterprises
55 percent of the large and medium-sized enterprises sold could be classified as non-competitive worker-management buyouts
Labeled as destatization officially and grabitization informally
This mass privatization failed to improve economic efficiency and induce normal market behavior
Instead generated effects of persistent arrears (non-payment of outstanding liabilities) and sliding into a barter (non-money) economy
178
Transition in Post-Soviet Russia:Problems with Barter Economy and Persistent Arrears The emergence of arrears due to the enterprises’ failure to keep
pace with collapse of demand in the short-run and to continue to produce
The underdevelopment of banking system played an additional role
Emergence of risk-free tax arrears and reliance on state subsidies
Resurfacing of barter economy 1960-mid 1980s → inefficient planned distribution Late 1980s-early 1990s → general shortages 1992-1994 → enterprises’ financial deficits Starting in 1997 → institutionally built into system and accounted
for 90 percent of industrial output
179
Transition in Post-Soviet Russia:Problems with Barter Economy and Persistent Arrears Barter economy and persistent arrears (amount overdue)
locked regions into local transactions, hindered competition and corrupted the effectiveness of property rights
Privatization and price liberalization created income inequality
State revenues, which consisted mostly of profits from state-owned enterprises during the Soviet era dropped as a result of the recession and mass privatization
Issuance of short-term state bonds that offered high interest rates crowded out private investment
180
Transition in Post-Soviet Russia:Deep Recession Russian industrial production fell by 55 %
Consequently, tax rates were raised creating a shadow economy
Budget debt increased
The rate of export dropped
The fall in oil prices magnified the current account deficit, causing a financial crisis that resulted in the devaluation of ruble in 1998
Severe economic instability and hyperinflation
181
Conclusion: The Soviet Model of a Command Economy Created by a combination of internal economic
underdevelopment and international political discontinuity in the aftermath of WW I, when workers’ revolutions threatened many nations
Designed to produce a transition from a relatively backward nation to a modern industrial society
Central planning that is a superior tool for balancing economic proportions and maximizing the use of resources, produced disproportionate and inflexible economic outcomes
Producing many problems, agriculture being a prominent example
