Transition of the Eastern Block
From Command Economy to Free Markets
Relevance of the Transition Today
• 1990’s- present: Transition in Eastern Europe
• 2004 – admission of several Eastern European states
into the EU
• 2007 – introduction of the Euro in one of the former
Soviet states
• Lessons on institutional development from the
transitional economies
• China today and its transition to a market economy
• Transition today in Vietnam
• Remaining command economies: Cuba and North Korea
Brief History of the Soviet Block
• Pre 1913 Russian Empire
– Agricultural orientation of the economy
• WWII and the impact on economic stability
• The Russian Revolutions of 1917
– February
– October
•
•
•
•
•
The Civil War and the birth of the USSR
New Economic Program (1922-1927)
Industrialization emphasis begins
Emergence of Coba
Agricultural Reform
– Collectivization and its process
– Later establishment of Sovhozes
• 1939 – First major Expansion of the Block
in Europe
– Division of Europe between Germany and the
USSR
• 1941-45: The Great Patriotic War
– Expansion of Siberian Industrial base
• 1945: Next phase in the expansion of the
Block in Europe
• 1945-50’s the recovery years
Performance of the Soviet Economy
Growth in Combined
Factor Inputs
Growth in Total
Factor
Productivity
1928 - 1940
4
1.7
1950 - 1960
4
1.6
1.4
1960 - 1970
3.7
1.5
0.9
1970 - 1975
3.7
0
1.5
1975 - 1980
3
-0.4
-0.8
1980 - 1985
2.5
-0.5
-1.2
Period
CIA estimates on
Growth in TFP
Source: G. Ofer, “Soviet Economic Growth”, Journal of Economic Literature
Growth in the Soviet Economy
Period
GNP Growth
GNP per capita Growth
1950 - 1960
5.7
3.9
1960 - 1970
5.2
3.9
1970 - 1975
3.7
2.7
1975 - 1980
2.6
1.8
1980 - 1985
2.0
1.1
Source: G. Ofer, “Soviet Economic Growth”, Journal of Economic Literature
Brief History of the Soviet Block
• Russia
–
–
–
–
–
–
–
1917 The two Russian Revolutions
1918-1922 The Russian Civil War
1922 Birth of the USSR
1922-1927 NEP
1924 Death of Lenin, Stalin’s era begins
1927- 1930’s Industrialization Program
1939 Expansion of the Block
• Latvia, Lithuania, Estonia, parts of Poland, Romania
– 1941-45 The Great Patriotic War
• Rapid growth of Siberian heavy industry bases
– 1945 Further Expansion of the Block
• Poland, Czechoslovakia, Hungary, Romania, Bulgaria, Yugoslavia,
Albania
Command Economy
• Central Planning
– Structure of the system
– Fixed prices
– Guaranteed/mandatory employment
• Simplification of industry structure
– Merger of enterprises and establishment of large
enterprises
• Competitive pressures
– Lack of competition domestically
• Collective farms (Kolhoz), versus state farms (Sovhoz)
• “13th month salary”
– International competition
The Slowdown
•
•
•
•
1953 – Death of Stalin
Khruschev’s Era
Breznev’s Era
Between Breznev and Gorbachev
The era of reforms begins
• 1985 Gorbachev comes to power
• 1987-88 the start of economic reforms in the USSR
• Fall of 1989 the Block starts to collapse in Eastern
Europe
• Commonwealth of Independent States (CIS), community
of independent nations established by a treaty signed at
Minsk, Belarus, on Dec. 8, 1991, by the heads of state of
Russia, Belarus, and Ukraine.
• January 1, 1992 – the USSR is dissolved; Reforms begin
in the newly independent Russia and all the other
republics
• In 1993, the CIS expands to include all of the former
Soviet Republics except the Baltic States. List of
members includes:
– Armenia, Azerbaijan, Georgia, Kazakhstan,
Kyrgyzstan, Moldova, Tajikistan, Turkmenistan,
Uzbekistan and the original three members
Industry value added as % of GDP
60.000
50.000
40.000
Poland
Romania
Russian Federation
30.000
Ukraine
France
Germany
20.000
10.000
0.000
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Characteristics of Transition
Command economy
1. Public ownership of means of production
2. “the state acts as one gigantic firm”
3. State set prices
4. State distribution of wealth
5. Central Planning
6. Principal – Agent Problem
Market Economy
1. Private enterprises
2. Price flexibility and Price signals
3. Market friendly institutional support
• Political
– From one party system to democracy
• Institutional
– Establishment of business education
– Business laws and property rights
– Tax system
• Economic
–
–
–
–
Privatization
Price liberalization
Tax collections
Open economy issues
• Investment
• Exchange rate regime
• Commerce with former republics
Reforms in Transitional Economies
planning is great if you have the opportunity to do it
• Privatization
• What’s the value of state enterprises?
• How should the shares of those enterprises be
allocated?
– Poland (intermediate funds), Czech Republic
(vouchers), Yugoslavia (worker-control), Russia
(combination of vouchers, management control…)
– Effect of the scheme on the scope of restructuring
- income distribution
- government budget
- differences between the economies of the USSR and
those of Eastern Europe
• Price liberalization
• Shock therapy versus gradual approach
- Poland (January 1, 1990) versus Hungary and
the experience of Russia
• Sequence of reforms (political and economic) and income
inequality
• Financial Stability and exchange rate
Economies in Transition: Real GDP growth rates
10.00
5.00
0.00
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Poland
-5.00
Romania
Russian Federat ion
Ukraine
Unit ed St at es
-10.00
France
Germany
-15.00
-20.00
-25.00
Pain of Transition
• Population comparison
• Standard of living comparison
Today
• Eastern Europe and the European Union
• Strong growth in Russia, and the world
markets of oil and natural gas
• Recent political changes in Ukraine,
Georgia
• Political problems in Uzbekistan, Belarus