OUTLINE -- Chapter 23

Transition Economies: Russia and China

REVIEW:

I. Command Economies: Ideology and Institutions

A. Marxian Ideology and Problems with Capitalism
  1. Marxists believe that capitalism will collapse
    a. unemployment
    b. inequities
  2. therefore the State (government or "people") need to own the resources and make the decisions

B. State Ownership and Central Planning
(IMPORTANT - think about the INCENTIVES provided by this structure)
C. Planning Goals and Techniques

  1. Industrialization (USSR) / Rural Development (China)
  2. Resource Overcommitment: could not achieve all targets
  3. Resource Mobilization: initial rapid economic growth, but . . .
  4. Allocation by Directives: rather than prices
  5. Government Price Setting
    1. a. ignored the normal function of prices
      • guiding resources
      • rationing resources

      b. prices used primarily as accounting devices

  6. Self-Sufficiency
    1. a. geography: surrounded by "hostile" capitalist countries
      b. self sufficiency = inefficiency
  7. Passive Macroeconomic Policies
    1. a. Macroeconomic Issues
      • UE
      • IN
      • EG

      b. full employment, but productive inefficiency
      c. low inflation, gov't price setting, and shortages

II. Problems with Central Planning

A. The Coordination Problem: products and resources
IMPORTANT - note the irony that a "centrally planned" economy has a coordination problem, but a capitalist economywith its "invisible hand" does not.
B. The Incentive Problem
IMPORTANT
  1. the role of profits and losses in capitaism
  2. but in command economies:
    • lack of incentives to change
    • lack of entrepreneurs
    • lack of competition and innovation
    • lack of motivation to work hard

III. Collapse of the Soviet Economy

A. Declining Growth
B. Poor Product Quality/Technology
C. Lack of Consumer Goods
D. Large Military Burden (Pres. Reagan?)
E. Agricultural Drag
  1. 30% of labor force
  2. low labor productivity
    (10% - 25% of US farmers)
  3. became major food importer

IV. The Russian Transition to a Market Economy
IMPORTANT - this is Structural Adjustment!!

A. Privatization
  1. 1. Results
    1. a. since 1992 - 2/3 privatized
      b. since 1992 - 90% small companies privatized
      c. since 1992 - 80% service-sector companies privatized

    2. How?

    1. a. initially vouchers
      b. later cash
      c. land reform?


B. Price Reform

  1. price controls and shortages
  2. removal of controls and inflation
    (prices increased 2x or 4x)
  3. BUT: high prices = profit (incentive) and more production
  4. AND: prices can be used to measure consumer wants and resource costs

C. Promotion of Competition
D. Joining the World Economy
E. Price-Level Stabilization

  1. inflation 1992: 1353%; 1997: 4%
  2. governement deficits and "printing money"

F. Major Problems

  1. falling output and living standards
  2. inequality and social costs

G. Future Prospects

V. Market Reforms in China