Borensztein E.R., et. al., 1992, “The Output decline in the Aftermath of Reform: the cases of Bulgaria, Czechoslovakia and Romania” IMF, Washington DC, Manuscript.
Brada, J., and King, A., 1986, “Taut Plans, Repressed Inflation and the Supply of Effort in Centrally Planned Economies”, Economics of Planning Vol. 20, 3.
Csaba, L., 1992, “After the Shock - Some lessons of transition policies in Eastern Europe”, Kopint-Datorg, Discussion paper. No.8, Budapest.
Calvo, G., and Coricelli, F., 1992, “Stagflationary Effects of Stabilization Programs in Reforming Socialist Countries: Enterprise-Side and Household-Side Factors”. World Bank Review Vol. 6, 1, pp. 71-90.
Edwards, S., 1991, “Stabilization and Liberalization Policies in Eastern Europe: Lessons from Latin America”, Department of Economics, UCLA, Manuscript. Los Angeles.
Fisher, M.Franklin, 1985, “Disequilibrium Foundations of Equilibrium Economic”, Cambridge University Press, London, (second edition).
Johnson, H., 1967, “The Possibility of Income Losses from Increased Efficiency of Factor Accumulation in the Presence of Tariffs”, Economic Journal, Vol. 77, pp. 151-154.
Koopmans, T.C., Montias J.M., 1991, “On the Description and Comparison of Economic Systems”, in Eckstein. A(ed), “Comparison of Economic Systems: Theoretical and Methodological Approaches” University of California Press, Berkeley.
Lipton D, Sachs J., 1990, “Privatization in Eastern Europe: The case of Poland”. Brookings Papers on Economic Activity, Washington, DC.
Olson, M., 1982, “The Rise and Decline of Nations, Economic Growth Stagflation and Social Rigidities”, Yale University Press, New Haven.
Podkamminer, L., 1982, “Estimates of the Disequilibria in Poland’s Consumer Markets” Review of Economics and Statistics. Vol. 64, pp. 423-431.
Persson, T., S. van Wijnbergen, 1993, “Signalling, Wage Controls and Monetary Disinflation Policy”, The Economic Journal, 103, January 1993, pp. 79-97;
Rostowski, J., 1991, “Comments on “Distortionary Policies and Growth in Socialist Economies” in V. Corbo, F. Coricelli, J. Bossak (ed): “Reforming Central and Eastern European Economies”. Washington, DC, The World Bank, pp. 191-193.
Simon, H., 1959, “Theories of decision-Making in Economics and Behavioral Sciences”, American Economic Review. Vol. 49, 3, pp. 253-283.
Winiecki, J., 1991, “The Inevitability of a Fall in Output in the Early Stages of Transition to the Market: Theoretical Underpinnings”, Soviet Studies, No. 4. pp. 669-676.
Chief Economic Advisor, the National Bank of Romania and was a visiting scholar. Research Department, the International Monetary Fund. Many thanks to Laszlo Csaba, Joshua Greene and Edouard Mciejewski for their helpful comments. As usual, I bear sole responsibility for the content of the paper. A version of this paper was presented at the Conference of the European Association for Comparative Economics, which was held in Groningen (Holland), September 1992. This version is to appear in the proceedings of the Conference, which will be edited by Laszlo Csaba.
The Keynesian case of unemployment may be viewed as reflecting a state of disequilibrium according to the first definition mentioned, especially if one bears in mind the existence of excess supply of labor at operating wages.
An economy where domestic absorption exceeds domestic output can be viewed as being in a stable state as long as the disequilibria of the external balance are tolerated by the outer world. When adjustments can no longer be put off, they will take place at the level of individuals and economic organizations. For an application of the concept of equilibrium at the level of individuals (economic agents) see, for instance, F.M. Fisher (1985, particularly p. 160).
The degree of inefficiency, (e), practically reduces labor productivity. In order to simplify analysis, only labor is considered in the production function.
Policy-makers over(under)react according to their preference function, which does not fit a Paretian welfare function.
Internalization is more intensive the smaller is the efficiency of the utilization of the imported capital.
The general criterion for measuring internalization in the first situation (the second situation speaks for itself) sounds like this: the extent to which repayment of the external debt creates a cumulated (over time) net disutility for the economy which translates itself into lower consumption and smaller economic growth rates.
The costs are felt on the supply-side of the economy in another way as well: a prolonged containment of internal consumption with the inherent lack of new material incentives to producers and individuals would hardly stimulate innovative efforts. In a worst scenario the consumption effect and the production effect would reinforce each other on a downward-going spiral. The point was made forcefully by L. Antal (1983) as well.
Benefits could accrue to the economy should a significant change occur in the attitude of the trading partners, following an improved financial standing of the debtor country.
In spite of the known term structure of the external debt its period of repayment becomes variable in the optimization analysis; the debt can be repaid faster than the period suggested by its original maturity schedule, or it can be restructured and paid back over a longer period. In general, it is hard to think that the time variation of internalization can enable a one-time process to take place since the critical floor levels of consumption and investment (obviously different for each national economy) act as restrictions.
The relative ease in subduing open inflation in the former Czechoslovakia would vindicate, partially, R. Portes (1977) and others who pointed out that central planners can be quite effective in keeping macro-imbalances under control. Relatedly, I would say: a) traditionally, Czechoslovakia showed better results vis-à-vis her communist neighbors in this respect; b) after the invasion of 1968, the new communist leaders struck a sort of tacit social contract with the population - more consumer goods through an altered Investment policy; c) though command economies generate shortages steadily and macro excess demand is a structural feature of the system, central planners can react and alleviate both micro and macro imbalances. However, when the assessment is made in terms of foregone performance, the country finds itself at a terrible loss after more than four decades of communist rule. One should recall that the former Czechoslovakia was a leading industrial power in Europe before the second world war.
At the end of the 1980s, these imports were 0.1 percent of the level at the start of the decade (0.1 billions in 1989, as compared to 1.1 billions in 1990).
In two main instances import substitution entailed soaring costs of production that showed up in higher nominal values of output. First, it is the case of promoting very costly domestic production of technology and equipment. Secondly, rising costs accompanied inexorably the efforts deployed to increase the degree of procurement of energy and raw materials out of domestic sources.
In the case of Poland, L. Podkamminer (1982) stresses the spillover effects in consumption due to distortions in relative prices.
There is another aspect about forced substitution in consumption that needs to be pointed out. Consumers are forced to purchase products of very low salability, which in conditions of a buyers’ market would go almost instantly out of production. The consumer’s utility bought by a certain amount of money is reduced through forced substitution. Moreover, an illusion of a possible value equality between the aggregate demand for and the aggregate supply of goods is created, through an administrative fixing of the prices (values) of the inferior goods. Here, one deals with additional distortions in prices, which can create a false value equality between aggregate demand and aggregate supply.
“It is important to recognize that household behavior, including the supply of labor and effort, is clearly determined by shortages faced in markets for individual goods, but unaffected by the existence of unsold inventories of other, overpriced goods” (J. Brada, A. King, 1986, p. 174).
The switch was reinforced by a shunning of domestic goods in favor of imported goods (a phenomenon acutely felt in the former East Germany)
What my colleague E. Ghizarie named decompression.
Some would link it with the elections of May 1990. Measured real wages rose by 11 percent over the period December 1989 - October 1990, while output was on the decline; price decontrol was initiated in November of that year.
The rising nominal wages against the background of declining output and price controls led to increased monetary holdings.
Real GDP fell by 7.4 percent in 1990 and by 13.0 percent in 1991. For 1992 the drop is 15.4 percent.
The external trade deficit in hard currency was $1,743 billion in 1990 and $ 1.357 billion in 1991 (Table 1).
In January 1992, P. Murrell asked me: “why did Romania resorted to an IMF supported plan In view of her excellent external account position at the start of the transition. I replied that: a) more important than the stock of external debt are the sustainable flows of imports; and b), under the prevailing social and political circumstances rejecting conditional support from the IMF would have forced authorities to try to reimpose direct controls, a path-policy scarcely desirable and, practically, unfeasible at the time. People too often tend to forget that the Chinese solution means “change controlled from above”. In Romania the social explosion triggered processes beyond any control.
Credit ceilings of 22 percent were imposed for the year and interest rates (although they remained negative in real terms) were liberalized in April of 1991.
Caused by the increasing overvaluation of the domestic currency due to inflation differentials.
Because, officially, internal convertibility was enforced.
From Lei 206/$l in April, it moved to Lei 226/$l in May, Lei 304/$l in June, Lei 365/$l in July, Lei 383/$l in August and Lei 430/$l in September (Figures are end of month).
After “exchange-rate reunification”, their claims for foreign exchange were not satisfied adequately by banks and a hard-currency overhang started to build up.
For more elaboration on inter-enterprise arrears as a symptom of a system under strain see D. Daianu (1993).
At a conference in Luxembourg, in February, 1991.
Expression concocted by J. Winiecki several years ago. Winiecki referred to King Midas of Antic Greece who was cursed to turn into gold everything he put his hands on, including his own food.
J. Rostowski (1991, p. 191) Is very much in my line of thought with his remark that in centrally administered economies the problem is not just that resources are allocated inefficiently, but the process of allocating them is Inefficient.
And all other who espouse an evolutionary approach. The leading fountain of ideas can be found in R. Nelson and S. Winter (1982).
Rules enjoying wide social acceptability are also to be included (D. North, 1982).
J. Sachs and D. Lipton (1991) voiced most strongly the need to privatize fast in order to avoid undermining stabilization.
I owe to L. Csaba the observation that weak governments raise the probability for such a vicious circle to occur.
This may be contrasted, for example, with the view that agents operate under “bounded rationality” (H. Simon 1958).
Analyzing stagflationary effects of stabilization policies In reforming economies G. A. Calvo and F. Coricelli (1992) emphasize the similarities between the “enterprise-side view” and the neo-structuralist approach.
Some of the drop - as pertinently underlined by J. Winiecki (1991) -is benefactory since it means doing away with useless production.
This is, for instance, what Gr. Kolodko (1991) and M. D. Nuti (1992) claim has happened in Poland, where too much emphasis was put on reducing external imbalance by “a too large devaluation of the zloty and too tight monetary and fiscal policy”.
The natural rate of adjustment (of accommodating change) of society can be defined as an imagined optimal speed of change that maximizes society’s welfare function intertemporally; it, itself, is adjustable because of the learning capacity of society. L. Csaba talks about a natural rate of ownership change (1992, p.22).
“Controls are more likely to be useful, the larger is the desired reduction in inflation, and the more serious is the credibility problem” (P. Persson, S. van Wijnbergen, 1993, p. 81).
A possible scheme would be to link incomes with the dynamics of saleable output, in the vein of what M. Weitzman proposed in a well known book (1984). Negative value-added enterprises should be closed without delay: it is less costly to pay workers unemployment benefits and retrain them than to keep these units running. Profitable enterprises do not pose any problem since they are in good business. The zone of concern for policy-makers is represented by unprofitable units, which, under normal conditions (with sufficient flexibility of resources) would have to be done away with. The idea is to resort to a phased in elimination according to a timetable that pursues reducing the costs of adjustment, and also allows a breathing space for figuring out which are the potentially viable enterprises. This gradual phasing out would attenuate unemployment and distribute its costs over time. At the same time, public authorities would have an easier time in securing resources for social-safety nets and for facilitating labor reallocation through training programs. The problem lies in convincing workers about the benefits of this scheme for the economy as a whole and for each and every one of the targeted enterprises. This objective could be achieved as part of a social compact within the framework of an industrial relations agreement that sees workers as an active voice in the management of transformation. It can be argued that such a scheme slows down restructuring, which is a valid statement if social and political constraints are dismissed. Nonetheless, to ensure that transformation is sustainable as a real process, there are many reasons for advocating the paramount importance of an adequate industrial policy.
In order to undergo a, relatively, smooth progress the process needs to be backed by a strong coalition of interests (a social base), a “reform constituency” which, unfortunately, can be built overnight since privatization is slow.