By the late 1980s, the ever more apparent failures and shortcomings of the planned economy and the collapse of the Communist political system in almost all countries of the Soviet Block enabled dramatic changes to all parts of society and the economy. Since the market economies of Western Europe and North America were the obvious reference point, transforming the planned economies into functioning market economies became a priority. This transition would ensure a better allocation of resources as well as technological progress and innovation and foster sustainable economic growth. To achieve this, it was necessary to profoundly change the underlying structures and incentives of the planned economy. While each country embarked on its own path towards a market economy, there is little dispute as to what reforms were necessary to get the new economic system going. Following Hare these include: (1) macroeconomic stabilisation; (2) price and trade liberalization; (3) privatization and enterprise restructuring; and (4) institutional reforms.
This essay examines the impact of some of these reforms on growth. It will also look into how initial conditions explain differences in growth outcomes that can’t be fully explained by policy choices. Focusing on inflation and fiscal balances, the first section will explore the role of macroeconomic stabilization in fostering growth. This is followed by section 2 and 3 which examine institutional reforms and liberalization. Section 5 takes a look at initial conditions in the form of overall development and economic distortions at the start of the transition period. Section 6 concludes and draws implications for the future.
Table of Contents
1. Introduction
2. Macroeconomic stabilisation and growth
3. The role of institutions
4. Liberalisation policies
5. Initial Conditions and Soviet Legacies
6. Conclusion and implications for the future
Research Objectives and Themes
This essay aims to evaluate the primary drivers of economic growth in former Soviet bloc countries during their transition to market economies, analyzing how macroeconomic stabilization, policy reforms, and initial conditions influenced varying development outcomes.
- Impact of macroeconomic stabilization on economic growth and inflation control.
- Role of institutional development and governance in shaping long-term growth.
- Effects of price and trade liberalization on resource allocation and GDP growth.
- Significance of initial conditions, such as economic distortions and levels of development, on transition success.
- Interdependencies and potential causality between growth and structural reforms.
Excerpt from the Book
Macroeconomic stabilisation and growth
There appears to be a broad consensus in the literature that achieving macroeconomic stabilization is essential for economic growth. Macroeconomic stability is usually measured by the inflation rate and fiscal deficits. Its absence complicates planning and discourages saving and investment. Inflation rates in the early 1990s were as high as 4500% dropping to an average of 7% in 2007 in the transition countries as transition progressed and stabilization was achieved. The significance of stabilisation is made clear by a paper by Havrylyshyn and Rooden in which they find that macroeconomic stability, measured by inflation rates and fiscal deficits is highly significant in explaining economic growth and accounts for up to 90% of the variation in growth across the region. Their results are supported by Gerry, Lee and Mickiewicz whose estimations show a consistently negative impact of higher inflation on growth. Similarly Hare finds that higher inflation and larger deficits are associated with deeper recessions at the outset of the transition process in 1992 to 1994. Falcetti, Lysenko and Sanfey’s estimations find comparable results for fiscal balances, arguing that a large fiscal deficit leads to lower growth rates. This is also supported by findings from the European Bank for Reconstruction and Development (EBRD). These show a negative impact of fiscal deficits and an especially big impact in the early transition years.
Realizing that high inflation is bad for growth naturally raises the question how far inflation rates should be reduced. There are studies finding that the relationship between inflation and growth is nonlinear and that, once inflation is below a certain threshold it does no more harm. There is however no consensus as to where this threshold is. Christoffersen and Doyle find that inflation rates above 13-15% can reduce output growth by 0.2%. They state the examples of Armenia and Russia which have reduced their inflation rates by 9 and 7 times, thus increasing growth by 1.8% and 1.4% respectively. However, their findings also suggest that increasing inflation if it is below the threshold does not benefit growth.
Summary of Chapters
Introduction: Outlines the historical context of the collapse of planned economies and defines the essential reforms—stabilization, liberalization, privatization, and institutional change—necessary for market transition.
Macroeconomic stabilisation and growth: Analyzes the critical relationship between macroeconomic stability (inflation and fiscal deficits) and growth, noting that while consensus exists on the necessity of stability, the specific thresholds for inflation reduction remain debated.
The role of institutions: Examines how institutional quality, measured by transition indicators, correlates with higher growth, while highlighting the complex, bidirectional nature of the relationship between institutional progress and economic performance.
Liberalisation policies: Investigates the economic impact of price and trade liberalization, concluding that these reforms, particularly when opening to international trade, provide significant channels for sustainable growth.
Initial Conditions and Soviet Legacies: Explores how starting conditions, such as initial economic distortions and "market memory," influenced the success of transition, noting that highly distorted economies often faced more severe initial shocks.
Conclusion and implications for the future: Synthesizes the findings, emphasizing that comprehensive reform strategies are essential and suggesting that once initial transition goals are met, countries must identify new, long-term sources of growth.
Keywords
Transition Economies, Economic Growth, Macroeconomic Stabilization, Inflation, Fiscal Deficits, Institutional Reforms, Liberalization, Price Liberalization, Trade Openness, Initial Conditions, Soviet Legacies, Market Economy, Governance, Structural Reform, Transition Indicators
Frequently Asked Questions
What is the primary focus of this work?
The work investigates the key drivers of economic growth during the transition of former Soviet bloc countries from planned to market economies, focusing on the interplay between policy choices and historical starting points.
What are the central thematic areas covered?
The main themes include macroeconomic stabilization, the impact of institutional quality on development, the role of price and trade liberalization, and the influence of pre-transition conditions.
What is the primary research goal?
The goal is to understand which specific reforms are most effective for growth and to determine how much of the variation in growth outcomes can be attributed to policy versus initial development levels.
Which methodology is employed in the study?
The essay utilizes a literature review approach, synthesizing empirical findings from established academic papers, EBRD transition reports, and economic working papers to evaluate the impact of various reforms.
What does the main body analyze?
The main body examines the statistical significance of inflation control and fiscal policy, the influence of legal and structural institutions, and the correlation between liberalization and GDP growth.
Which keywords characterize the research?
The work is characterized by terms such as transition economies, macroeconomic stabilization, institutional reforms, price and trade liberalization, and initial economic conditions.
How does the author view the "causality" between reforms and growth?
The author highlights that the relationship is often bidirectional; while reforms drive growth, higher growth levels often provide the resources and political stability needed to implement further, deeper reforms.
What role did initial economic distortions play in transition?
The study indicates that higher levels of initial distortion, caused by centralized planning and lack of market experience, made the immediate "shock" of liberalization more severe, leading to deeper initial recessions.
- Citar trabajo
- Max Sahle (Autor), 2013, Initial conditions, policies and growth in the former Soviet bloc, Múnich, GRIN Verlag, https://www.grin.com/document/281611
