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Central Eurasia: Making Markets
I.
The Fall of Communism
A. Contributing
factors
1.
Soviet economic growth slowdown.
2.
East-West normalization, changing attitudes.
3.
Rise/fall of world energy prices, causing instability.
4.
Rise of labor movement in Poland, encouraged by Polish Pope.
5.
Soviet involvement in Afghanistan, causing social problems.
6.
Death of Tito, instability in Yugoslavia.
7.
Technological lead of industrial West and Asian NICs.
8.
Gorbachev’s glasnost, political reform, end Brezhnev doctrine.
9.
Chernobyl disaster (1986) and Armenian earthquake (1988).
10. Yeltsin's
attack on Party privilege.
11. Failed
coup attempt (1991), dissolution of Soviet Union.
B. Lessons
1.
Fall of communism was result of many trends and events.
2.
Few problems that contributed to the fall
of communism were quickly resolved by
its failure.
II. The
Starting Line
A. Historical
advantages: background in Austro-Hungarian empire.
B. Private
sector development: Poland, Yugoslavia, Hungary, Bulgaria.
C. Dominance
of large firms, esp in Czechoslovakia.
D. Military
spending highest in Bulgaria, USSR, and Poland.
E.
Low unemployment, except in Yugoslavia.
F.
Largest budget deficits in USSR, Albania, Poland, Romania.
G. Highest
monetary growth and inflation in Poland and Yugoslavia.
H. Signs
of repressed inflation, monetary overhang, in all except Hungary.
I.
External debt heavy in Yugoslavia, Hungary, Poland and Bulgaria; light
in Romania, USSR, and Czechoslovakia.
J.
Currencies were most overvalued—according to black market exchange rate premium—in Soviet Union and Romania;
least overvalued in Yugoslavia and Hungary.
III. Transition
Tasks and Strategies
A. Tasks:
1.
Macroeconomic
stabilization
2.
Price liberalization
3.
Privatization
4.
Military conversion
5.
Anti-monopoly reform
6.
Labor market reform
7.
Banking reform
8.
Financial market reform
9.
Tax reform
10.
Legal reform
11.
Social welfare reform
12.
Foreign exchange market reform
13.
Foreign trade reform
14.
Foreign investment reform
B.
Strategic
Concept
1.
Government-managed transition versus laissez faire
2.
Guiding importance of political stability, foreign investment, IMF
support, EU membership, or independence.
C. Pace
1.
Arguments for shock
therapy
a.
interdependence of market institutions
b.
preempt political opposition
c.
aggressive programs in Central
Eurasia are generally associated with milder transformational recession
(but both of these may reflect historical and initial conditions).
2.
Arguments for gradualism
a.
“first things first”—legal and social foundation
b.
key sectors first? agriculture?
c.
careful preparation, avoid mistakes
d.
spread pain of adjustment
D. Sequence–typically, (1) stabilization,
(2) price liberalization, (3) small-scale privatization, monopoly
regulation, tax reform, and foreign market reform, (4) large-scale
privatization, military conversion, legal reform, development of securities
markets.
IV. Money,
Public Finance, and Prices
A. First
stage of financial adjustment—release of repressed inflation, mildest
in Czech and Slovak republics and Hungary.
B. Second
stage of adjustment—inflation declined to still-high levels
1.
Inflation sustained by:
a.
state budget deficits caused by large subsidies to state enterprises,
small contributions to the budget from those same enterprises, and
poor enforcement of tax collections from the new private sector.
b.
subsidized central bank credits to unprofitable state enterprises.
c.
reorientation of production from plan to market.
d.
disruption of regional production and trade relations.
2.
During stage 2, inflation fought by:
a.
deficit reduction—reduce subsidies, strengthen tax collections.
b.
selling treasury securities to general public, rather than central
bank.
c.
incomes policies—taxes on excessive wage
increases, real wage agreements among government officials, employers,
and union leaders.
d.
monetary anchors—fixed
exchange rates—to impose additional
discipline.
C. Third
stage of adjustment—inflation below 40 percent per year.
1.
Benefits are less certain, but include domestic and international
confidence in currency and policy.
2.
Disadvantage—continued disinflation may reduce the flexibility of
relative prices if some prices are inflexible downward.
V. Privatization
A. Objectives
1.
Raise efficiency.
2.
Obtain skills and capital.
3.
Reduce budget deficits.
4.
Pursue social justice. Return to pre-Communist
owners? Highest bidder? Workers? Population?
5.
Simplicity and speed.
B. Methods
1.
Differ for small
and large privatizations.
2.
Distinction between managed
and spontaneous privatizations.
3.
Options
a.
restitution
b.
equal-access voucher privatizations
c.
management-employee takeover
d.
auction
e.
strategic investors in a closed-bid tender
offers.
f.
loans for shares auctions
C. Results
1.
Private sector share of regional GDP increased from 11 percent
in 1989 to 50 percent in 1995. Most aggressive programs in East-Central
Europe, the Baltic states, Russia, and Albania. Least aggressive in
Belarus, Turkmenistan, and Uzbekistan.
2.
In Bulgaria, the Czech Republic, Hungary, and Poland, the share of
subsidies in GDP declined from an average of 16 percent in 1989 to
3 percent in 1994.
3.
Impact on microeconomic efficiency is ambiguous. “Outside” sales seem
to be more effective than “inside.”
VI. Banking and Finance
A. Transition
from physical output planning to financial decisionmaking.
B. Transition
from monobanking systems to two-level systems.
C. Poor
control of bank creation led to weak institutions.
D. Creation
of securities markets. Small in most countries, except Czech
Republic. Tainted by several high-profile instances of fraud.
E.
Financial systems distorted by nonpayments crises. Failure to pay suppliers,
government, employees. In 1997, the share of barter in payments among
all industrial enterprises in Russia reached more than 50 percent,
and 40 percent of all taxes paid to the Russian federal government
were nonmonetary.
Source:
IMF World Economic Outlook Database, 2008
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