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Economic Transition of Economic Transition of Centrally Planned Centrally Planned
Economies to Liberal Economies to Liberal Market EconomiesMarket Economies
Basic FactsBasic Facts Basic MechanismsBasic Mechanisms
ReallocationReallocationDisorganizationDisorganizationRestructuringRestructuring
Partial AnalysisPartial Analysis Start of TransitionStart of Transition and the and the Initial Adjustment of Initial Adjustment of State FirmsState Firms
Global AnalysisGlobal Analysis The Benchmark ModelThe Benchmark Model
Basic MechanismsBasic Mechanisms
ReallocationReallocation FromFrom PPublic ublic toto PPrivaterivate Sector = Sector =
PrivatizationPrivatization
Basic MechanismsBasic Mechanisms
DisorganizationDisorganization Collapse of CMEA (Council of Mutual Collapse of CMEA (Council of Mutual
Economic Aid = COMECON)Economic Aid = COMECON) The role of time horizonThe role of time horizon
Firms experience shortages of materialFirms experience shortages of material Long term relationships with suppliers had Long term relationships with suppliers had
been brokenbeen broken Macroeconomic Policies – problem of Macroeconomic Policies – problem of
inflationinflation
Basic MechanismsBasic Mechanisms
RestructuringRestructuring Aim of restructuring is increase in Aim of restructuring is increase in
productivityproductivity Either decrease of employment or Either decrease of employment or
increase of outputincrease of output Fears of unemployment slow down Fears of unemployment slow down
restructuringrestructuring
Basic MechanismsBasic Mechanisms
Real developmentReal development Specific situation of East GermanySpecific situation of East Germany The role of social factors in RussiaThe role of social factors in Russia
Basic MechanismsBasic Mechanisms
Restructuring and PrivatizationRestructuring and Privatization Barriers to RestructuringBarriers to Restructuring
Opposition of InsidersOpposition of Insiders Lack of CapitalLack of Capital
Privatization toPrivatization to InsidersInsiders OutsidersOutsiders
From Insider Ownership to ResaleFrom Insider Ownership to Resale
Partial AnalysisPartial Analysis
Start of transitionStart of transition price liberalization + removal price liberalization + removal
of subsidiesof subsidies
triggeredtriggered
the collapse of state firmsthe collapse of state firms growth in the new private growth in the new private
sector was insufficient to sector was insufficient to take up the slacktake up the slack
Partial AnalysisPartial Analysis
The Initial Adjustment of State The Initial Adjustment of State FirmsFirms SituationSituation
The Hardening of the Budget The Hardening of the Budget ConstraintConstraint
ReactionsReactions The Appropriation of profitsThe Appropriation of profits Delays in Payments of taxes and to Delays in Payments of taxes and to
SuppliersSuppliers Bad LoansBad Loans The Choice of Employment and WagesThe Choice of Employment and Wages
Global AnalysisGlobal Analysis
The Benchmark ModelThe Benchmark Model Interactions amongInteractions among
Growth of the new private sectorGrowth of the new private sectorRestructuring of the state firmsRestructuring of the state firmsUnemploymentUnemployment
Two Phases of TransitionTwo Phases of Transition1st : High unemployment prevents 1st : High unemployment prevents restructuring, action comes from private sector restructuring, action comes from private sector growth only.growth only.2nd : Economy proceeds along a balanced 2nd : Economy proceeds along a balanced path, where private sector employment path, where private sector employment creation absorbs the employment losses from creation absorbs the employment losses from restructuring. Output grows as a result of both restructuring. Output grows as a result of both reallocation and restructuring and reallocation and restructuring and unemployment remains constant until unemployment remains constant until transition has been achieved.transition has been achieved.
Global AnalysisGlobal Analysis
Assumptions of the benchmark Assumptions of the benchmark modelmodel
State and private sectorState and private sectorPre-transition is no unemploymentPre-transition is no unemploymentJust after the start of Just after the start of transformation (price liberalization, transformation (price liberalization, elimination of subsidies), elimination of subsidies), employment in state firms employment in state firms decreases and unemployment is decreases and unemployment is generatedgenerated
Global AnalysisGlobal Analysis
Summary of the first half of Summary of the first half of the modelthe model
Private employment creation Private employment creation depends on the profit rate. The depends on the profit rate. The profit rate depends in part on profit rate depends in part on the wage. The wage is a the wage. The wage is a decreasing function of decreasing function of unemployment. Thus, other unemployment. Thus, other things being equal, higher things being equal, higher unemployment leads to higher unemployment leads to higher private employment creation.private employment creation.
Global AnalysisGlobal Analysis
Summary of the second half Summary of the second half of the modelof the model
Restructuring of state firms Restructuring of state firms implies both an increase in implies both an increase in output and an increase in output and an increase in unemployment. The decision to unemployment. The decision to restructure depends, among restructure depends, among other things, on the state of the other things, on the state of the labor market: the higher the labor market: the higher the unemployment rate, the less unemployment rate, the less likely restructuring is to take likely restructuring is to take place.place.
Global AnalysisGlobal Analysis
Putting two halves togetherPutting two halves togetherIf initial unemployment is below If initial unemployment is below some critical value, then some some critical value, then some restructuring takes place restructuring takes place instantaneously until instantaneously until unemployment is equal to that unemployment is equal to that critical value. Transition then critical value. Transition then takes place at the constant takes place at the constant unemployment rate, with the unemployment rate, with the flow of lay-offs from flow of lay-offs from restructuring equal to the flow restructuring equal to the flow of hirings in the new private of hirings in the new private sector.sector.
Global AnalysisGlobal Analysis
If initial unemployment is above If initial unemployment is above some critical value, then there is some critical value, then there is no restructuring until private no restructuring until private employment creation has employment creation has decreased unemployment down decreased unemployment down to that critical level. At that to that critical level. At that point, the flow of restructuring point, the flow of restructuring starts and the economy follows a starts and the economy follows a balanced transition path with balanced transition path with constant unemployment.constant unemployment.