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Lessons from transition economies
Popov, Vladimir
Popov, Vladimir
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Abstract
"In the first approximation, the transformational recession is basically a supply-side phenomenon, a structural adjustment process resulting from the need to overcome disproportions inherited from the centrally planned economy (CPE) - high militarization, overindustrialization and underdevelopment of the service sector, "under-openness" of the economy, the perverse structure of trade among former Soviet republics and among socialist countries. The greater the magnitude of these distortions inherited from the centrally planned economies, the more pronounced the reduction of GDP during the transformational recession. The supply-side explanation implies that the reallocation of resources (restructuring) due to market imperfections is associated with the temporary loss of output. Thus, the decline in the production of non-competitive enterprises and industries is not offset immediately by an increase in the production of competitive industries and enterprises due to barriers to capital and labor flows such as poorly developed banking system and securities markets, uncertain property rights, the lack of easily enforceable and commonly accepted bankruptcy and liquidation procedures, the underdevelopment of land market, housing market and labor market infrastructure, and so on. Attempts to separate non-policy from policy factors by running multiple regressions produce some statistically satisfactory and economically meaningful results.3 Though there is a relationship between the magnitude of output decline on the one hand and the liberalization index and inflation on the other (R2 = 65%), it weakens greatly or even disappears completely once variables that characterize objective conditions are factored in. It is noteworthy that nearly 70% of the variations in the magnitude of the decline of output may be explained by only two dummy variables (both significant at the 1% level) that account for membership in the FSU and for wars. It is even more remarkable that the addition of liberalization variable to the equation does not seem to make any difference: the correlation coefficient does not increase when liberalization is taken into consideration; to make matters worse, the coefficient of the liberalization index is not statistically significant and has the unexpected sign: the greater the liberalization, the larger the decline of output. Inflation variable is always significant and has the predicted (negative) sign, but this cannot be considered as an important finding: the link between macroeconomic stabilization and economic growth was demonstrated more than once for a much greater group of countries (see, for instance: Bruno, 1995; Bruno and Easterly, 1995). These results suggest that the usual argument linking the better performance of EE, especially the Central European countries (as compared to the FSU, especially the CIS countries), to better economic policies (greater liberalization) does not necessarily hold. Indeed, the identification and decomposition of the "FSU effect" may be carried out more effectively by bringing into the equation not policy variables, but non-policy factors, such as the relative magnitude of the distortions in trade and industrial structure."(pg 5)
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2001-09-07
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With permission of the license/copyright holder