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Transition of the Eastern Block From Command Economy to Free Markets

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

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Transition of the Eastern Block From Command Economy to Free Markets

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  1. Transition of the Eastern Block From Command Economy to Free Markets

  2. 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

  3. 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

  4. 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

  5. Performance of the Soviet Economy Source: G. Ofer, “Soviet Economic Growth”, Journal of Economic Literature

  6. Growth in the Soviet Economy Source: G. Ofer, “Soviet Economic Growth”, Journal of Economic Literature

  7. 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

  8. 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

  9. The Slowdown • 1953 – Death of Stalin • Khruschev’s Era • Breznev’s Era • Between Breznev and Gorbachev

  10. 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

  11. Characteristics of Transition • Command economy • Public ownership of means of production • “the state acts as one gigantic firm” • State set prices • State distribution of wealth • Central Planning • Principal – Agent Problem • Market Economy • Private enterprises • Price flexibility and Price signals • 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

  12. Reforms in Transitional Economiesplanning 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

  13. Economies in Transition: Real GDP growth rates

  14. Pain of Transition • Population comparison • Standard of living comparison

  15. 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

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