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This paper vas prepared for the session “Output Collapse in Previously-Centrally Planned Economies” held at the American Economic Association Meetings in Boston, January 3-5, 1994. The views expressed are exclusively those of the authors and should in no way be attributed to the Fund. We wish to thank Andy Rose and Janet Yellen for their help in obtaining data on the former East Germany, as well as Peter Wickham and participants at the AEA meetings for helpful comments.
Another related point of course is that countries that delayed reforms did not avoid a collapse of output. In much of the region, output was on a downward path prior to the initiation of reforms and it is not immediately obvious what the counterfactual to the reforms might look like, that is how big a fall in output would have occurred had the reforms not taken place.
In Poland, for instance, the private sector may have grown some 15-20 percent in 1990-91. In the region of Prague, the unemployment rate fell to about 1 percent in 1991 (while it was reaching nearly 15- percent in industrial areas) thanks in large part to the expansion of small private businesses.
This is the analogue to Stockman’s productivity disturbances.
While Stockman (1988) estimates essentially the same regression for a set of industrial countries, he is testing for a different effect, namely evidence of a “real business cycle” in the form of significant industry-specific shocks. There is, in fact, a small literature on the decomposition of output changes into industry-specific regional, and national components. Stockman’s methodology was applied here mainly because it Imposes fewer structural assumptions on the data than some of the other papers in this literature.
We estimated equation (1) by pooling monthly data on production in 10 industrial sectors for Poland, Hungary, the former Czechoslovakia, and the former East Germany on samples that begin on the dates of each country’s “big bang”. The big bang date is defined with reference to the date of the first major price liberalization, and of monetary union with the West in the case of the former East Germany. The sample thus spans the period January 1990 to December 1991, and measures the initial Impact of the reform measures. Because of changes in methodology and coverage, the data could not be extended to later dates.
If one were to compare these results with those obtained by Stockman for the G-7 countries, one would see that the point estimates of the fractions of total variance accounted for by national versus industry factors are quite similar to those reported in Table 1 (although, clearly, the relative-price shock experienced by the Eastern European countries was much larger). The difference, however, is that the standard errors associated with the industry factors are much higher for this group of countries than for the G-7. This results in the industry factors’ statistical significance being much lower than that reported in Stockman’s study.
Despite the large role generally attributed to the collapse of CHEA trade (Rodrik (1992)), it is far from obvious that this was the main determinant of the output decline, as the experience of Poland in 1990—when output declined by 12 percent despite an increase in CMEA exports—clearly illustrates.
Credit, in their model, like labor and capital, is an input into the production process.
Another supply-side shock experienced by some countries, including Romania, was lack of access to imported raw materials because of a shortage of foreign exchange.
It should be noted that in several countries, including Poland, the terms of trade deterioration was accompanied by a sharp increase in real product wages in 1991 (in contrast to 1990), making the supply-side disturbance all the more pronounced.