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What do Economists Know about Transition to a Market System? Lawrence R. Klein Susan Yang & James Durda.

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Presentation on theme: "What do Economists Know about Transition to a Market System? Lawrence R. Klein Susan Yang & James Durda."— Presentation transcript:

1 What do Economists Know about Transition to a Market System? Lawrence R. Klein Susan Yang & James Durda

2 Central Planning Marxism-Leninism The Labor theory of value influenced social accounting Theory of complete state ownership was used to determine input, output, and prices of goods. INFLATION Printing too much paper money leads to problems (Central planners should be able to seek great economic outcomes, but this did not happen.)

3 Competitive Economy Each firm pursues own interests, maximizing profits. Walras theorized an equation for all supplies and demands. This is known as Market Clearing. S(p1…pn)=D(p1…pn) The Market Clearing solution does not provide adequate information. These are the assumptions:  Free entry  Equal access to economic info  Rational agents  Absence of monopoly or monopsony power  Absence of natural disturbances  Full employment of people and resources Strong assumptions

4 Which one worked? Neither. “Each functioned in practice as a mixed economic system. There are planning and socialistic aspects to all economies that regard themselves as primarily capitalist. Similarly, there are market and private capitalist aspects of socialist planned systems”(77).

5 The Concept of Market Socialism Introduce market pricing into a socialist economy The difference from Central Planning is that the board does not fix prices, they respect market solutions The Board should:  Change prices (not fix prices) until markets are cleared  Allow consumer choice  And require cost-effective operation producers Some Economists argued that market based socialism would be hard to implement. They did not want to modernize or liberalize socialism.

6 (Macroeconomic) Stability Criteria for Transitioning  Keeping inflation in restraint (under 10%)  Maintaining a high level of employment  Maintaining strong output growth  Keeping the income/wealth distributions equitable  Providing basic social services  Building up the country’s infrastructure  Keeping the balance of intl. Payments near equilibrium  Keeping the internal fiscal balance near zero  Keeping money supply on moderate growth path

7 Transitioning Procedures  The target has been one of a mixed economy of market socialism  Increase trade and technology  Creation of special economic zones  Introduction of modern economic education  The absorption of quantitative methods from econometrics and statistics in prep for application to economic planning

8 Lessons from Korea Irma Adelman

9 Korea’s Economic Development Two five year plans implemented by President Park First Plan: focused on infrastructure development and import substitution Second Plan: emphasized export- oriented industrialization

10 First Five Year Plan (1962-66) Strategy: increase employment by applying labor-intensive methods to construct new infrastructure (roads, dams, irrigation, etc.) Import substitution: this increases employment and improves the balance of payments. This also reduced the inflow of foreign goods.

11 Results The fast growing industry generated inflation which averaged 16 percent and exceeded 20 percent in two out of five years. “Between 1960 and 1981, Korea had the highest inflation rate among the Asian newly industrializing countries”(Song 1996). Byung-Nak Song is a Korean economist who wrote a book called The Rise of the Korean Economy. She provides great information on Korea’s economic and industrial growth. The overall strategy was successful for growth and social development but it did not compete with the world market.

12 Second Five Year Plan (1967-72) Emphasis shifted from imports to exports Strategy: ranged from nondiscretionary market-oriented measures to presidential pressure on individual firms Firms that exceeded their quotas were rewarded by subsidized credit and import licenses. Those that fell short were liable to lose their foreign trade licenses and sometimes were tax audited or their utilities were shut off.

13 Results The economy grew very fast Employment rose by 25% and unemployment was cut in half. The distribution of income became more level. School enrollments increased by 28% Infant mortality dropped by 30% Life expectancy rose by five years

14 Economic Troubles Mismanaged financial liberalization led to severe economic troubles Between 1995-1997 international claims on banks had risen by 30 percent. Korea experienced a huge swing in foreign capital flow. “There was a $20 billion outflow during 1997, compared with a $100 billion inflow the previous year”(129). This results in a recession

15 Lessons for Russia “With leadership committed to development, it is possible to turn a corrupt soft state into a hard, developmental state. [South Korea’s economy started as] a sinkhole for foreign assistance. It was only with the birth of the strong developmental state and the adoption of a coherent development program that the Korean economic miracle was born”(131).

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