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Economies in Transition

Economies in Transition. Classification of Transition economies. Central and Eastern European Economies Albania, Bulgaria, Croatia, Czech republic, Macedonia, Hungary, Poland, Romania, Slovak Republic, Slovenia Baltics Estonia, Latvia, Lithuania

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Economies in Transition

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  1. Economies in Transition

  2. Classification of Transition economies • Central and Eastern European Economies Albania, Bulgaria, Croatia, Czech republic, Macedonia, Hungary, Poland, Romania, Slovak Republic, Slovenia • Baltics Estonia, Latvia, Lithuania Commonwealth of Independent States (CIS) Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan • Transition Economies in Asia Cambodia, China, Laos, Vietnam

  3. The Legacy of Central Planning How does it differ from market economies? • no goods market • no asset market • no labour market Successes • unemployment is low • income distribution is more equal • education and health care is high Core Problems • no incentives for efficiency or innovation • limited external trade

  4. Economic Indicators • Three groups:NIS;CEEC;Asian Transitional • Treat Statistics with caution • Low or middle income countries • Development issues + Economic transition • China (’78);Vietnam(’86);CEEC/NIS (90-94) • In some cases, political factors delayed reform • Deep depression with reforms in NIS and CEEC • Economic Growth; China and Vietnam

  5. The Tasks of Reform • Economic Stabilisation of the Economy • Liberalisation • Define property rights • Institutional development

  6. Economic Stabilisation • Defining Economic Stabilisation • Controlling inflation • Controlling budget deficits • Controlling external debt • Problem: • Social legacy of overinvestment in heavy industry and state ownership • Isolation from world trade and investment • No tax sytems or financial markets • Deficits financed by borrowing (IMF) and printing money (inflation problem)

  7. Liberalisation • Liberalisation refers to the replacement of administrative controls with market based allocative mechanisms • Domestic prices are free from bureaucratic control and individuals and enterprises are free to buy and sell and to import and export • End of state control of foreign trade and links between foreign and domestic prices are created • Liberalisation also refers to input markets. Labour markets require provision for UE benefit pension systems etc. Financial markets require tax and security laws and development of financial service firms

  8. Property Rights • Refer to the legal rights to use an asset, exclude others from its use, to collect income from it and to dispose of it. • Clear property rights is essential for efficient operation of the market • In transition economies, most assets were owned by the state. • To overcome this problem requires a large number of supporting actions, such as the development of contract and commercial law, privitisation of State owned assets and explicit recognition of the commercial rights of individuals

  9. Institutional Development • Refers to the creation of market supporting institutions • Legal systems • Definition of property rights and entitlements • Social support programs • Enforcement mechanisms • Information systems

  10. What happened? • Output fell • Labour Moved • Trade Reoriented • Economic Structure Changed • Institutions Collapsed • Transition Costs appeared

  11. Should the transition be fast or slow? • Big Bang V Gradualist approach • Slow Reform:China • Process began in 1978 with reform of agriculture • From mid 1980s extended its reforms to a number of special economic zones (SEZs) • “dual- track strategy” localising reforms to certain sectors • By early to mid-90’s more than 90% of retail prices and 80-90% of agricultural and intermediate good prices were decontrolled • SOE continue to be a significant share of the economy

  12. Big Bang Approach • Case Study: Vietnam (1986) • 1986 gradualist approach; big banf aproach from 1989 • Agriculture and trade were liberalised, prices decontrolled, fdi encouraged, fiscal deficit was cut along with subsidies to state enterprises and new business enterprises were encourages • Growth rate jumped

  13. Old and New Trade Patterns • Feature: Shift in CEE trading patterns has resulted in a change in the direction of trade and the composition of trade • The Council for Mutual economic Assistance (CMEA) • Exports to Industrial Nations (fig) • Exports to CMEA Nations (fig)

  14. Trade Policy and the Transition • Steps to trade liberalisation • end state monopoly on trade • linking domestic prices to world prices • formulate an explicit trade policy • adopt rules governing foreign investment • formulate and ER policy

  15. Conclusion • Sharp distintion between policies followed and their impact between Central Europe on the one hand and Russia and the CIS countries on the other. • Main Reason for divergence relate to political attitudes towards reform.

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