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ECONOMIC TRANSFORMATION Sabina Hadzibulic, Ph. D. student

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1 ECONOMIC TRANSFORMATION Sabina Hadzibulic, Ph. D. student

2 Socialist economy  Centrally planned economy (CPE)  Command economy  Five-year plan (established in Russia in 1921 for the first time)  State planning agency (central party & state bodies)  Legislature  Various economic ministries (for agriculture, electrical engineering, etc.)

3  Major problems of centralized (or command) approach to planning:  No new initiatives or passing limits; innate conservatism that led to slow-down of the economy  Centrally determined prices and heavy subsidization of many goods and services  Economy was hierarchically based (individual production and service units – middle bodies (combines, associations, cooperatives, etc.) – economy ministries – state planning agency – central party)  State owns most of the important assets in society (socialization of the means of production), but there were always other types of ownership (collective, private)  Problem of priorities (Soviet competition with America, military expenses, privileging of heavy industry over other sectors, i.e. imbalance between sectors; prioritization of collective goods prevented the development of consumer goods industries)

4  Case of Yugoslavia (conflicts over the distribution of funds between the republics)  Case of Albania (underdeveloped economy and complete isolation – no external funds or trading agreements)  Economic performance (analyzed by considering economic growth rates over time)  Difficulties with measuring economic growth in socialist countries:  Different method for calculating economic growth in socialist countries (West: Gross Domestic Product>GDP or Gross National Product >GNP; Socialist: Net Material Product>NMP)  Reliability and validity of data (manipulation by authorities, incompetency)  Table 8. 1.

5  New governments of East and Middle Europe inherited devastated economy that has bankrupt (stagnation, fall of GDP, decrease of living standard, inflation, indebtedness, insolvency, structural crises, unwillingness to adapt)  Complex economic metamorphoses:  Stopping of the inflation  Marketization and privatization  Reconstruction of the economy as a whole (need for the new infrastructure based on modern communication systems, renewed system of transport and economic energy, expended service sector, technologically refreshed industry and agriculture, new competing sectors)

6  Reforms should start simultaneously  More complex than the political one  No previous experience  No alternative reorganization or transition  Different starting position and various pasts

7  Methods for the economic transformation:  Shock therapy (or Big Bang approach) – according to the western radical rationalist Harvard economist Jeffrey Sachs  Gradualism – the ones that have not completely denied and rejected communism

8  Several major components of the transitional economies:  Marketization – opposite of planning, since it allows supply and demand to balance themselves out via abstract forces. It relates to:  pricing (liberation of prices, no more price-setting by central party, removing subsides in order to make enterprises more price-conscious and efficient, different approaches – Poland, Czecho-Slovakia, Russia – criticism)  competition (taken many forms, refers to subjecting production units to more competition through domestic demonopolization and bigger exposure to the international market – by introducing convertibility)

9  Privatization – turning state-owned property into private- owned property  No people inside the state with enough capital, skills, experience and will to buy the enterprises from the state  Two sorts of privatization (small - scale, large – scale)  Methods of privatization: 1. Mass privatization programs (2 types) a. Citizen voucher schemes (government gives the vouchers to the citizens enabling them to acquire shares in enterprises or investment funds OR citizens purchase vouchers from the states) b. Employee share schemes (employees of a particular enterprise are offered shares in it)

10 2. Foreign investments programs (3 types) a. Joint ventures (foreign investors either purchase a share in the existing enterprise OR else invest jointly with the host country in a brand new project; advantages; consequences) b. Direct foreign investment (foreign investor buys an existing enterprise or finances the establishment of the new one; it can be done in 3 ways: government agency sets the sale price, tender, auction) c. Diaspora investments

11  Three further approaches: 1. Extending bank credits (taking ban loans in order to have a share in the investing fund or selling enterprises, paying off with interest; foreign banks when no funds) 2. Direct sell-offs to citizens (tenders, auctions; many suspicious buyers) 3. Restitution of property  Post-communist states usually opted for several of these approaches (some precede others; each state has its own combination; some use radical methods in certain areas, while the others are more gradual, etc.)

12  Problems of privatization:  Lack of an entrepreneurial culture  Shortage of capital  Sociopolitical reasons  Inadequacy of the legal framework (laws on market economy, laws on the behavior of financial institutions, consumer protection laws, economic regulations-control of prices, etc., laws on restitution)

13  Priorities (since the private sector is still fragile and emerging, governments are obliged to intervene in the economy and specify certain priorities; no more spending on defense and hard-industry, governments are not privileging any sector)  Performance  Performance of the early post-communist era is unimpressive (lack of big investments due to the absence or variable legislation on ownership, taxation, restitution, etc.)  Tables

14  Informal economy (“grey economy” ) in transitional period  Production and distribution of goods and services that is not institutionally regulated (not prohibited, but institutionally/legally unregulated)  Features in the transitional period:  Extended dimensions of informal economy  Unusual activity of its participants  Different patterns of adjustment of the participants in the institutional vacuum and economic crises  Table: The share of informal economy (%) in the overall GDP in the selected economies in transition (source: EBRD, Transition Report 1997, according to Cvejic, 2006: 26)

15 1989199019911992199319941995 BDP per capita in $ 1995 Belarus 1215,416,613,21118,919,34220 Georgia 1224,93652,36163,562,61813 Kazakhst. 121719,724,927,234,134,33664 Moldova 1218,127,137,33439,735,72069 Russia 1214,723,532,836,740,341,64480 Ukraine 1216,325,633,63845,748,92400 Uzbekist. 1211,47,811,710,19,56,52370 Latvia 1212,81934,33134,235,33291 Lithuania 1211,321,839,231,728,721,64471 Estonia 1219,926,225,424,125,111,84138 Azerbaij. 1221,922,739,251,25860,61665

16 1989199019911992199319941995 BDP per capita in $ 1995 Hungary 272832,930,628,527,7296410 Poland 15,719,623,519,718,515,212,65400 Slovakia 67,715,117,616,214,65,87320 Czech Rep. 66,712,916,9 17,611,39770 Bulgaria 22,825,123,92529,929,136,24588 Rumania 22,313,715,71816,417,419,14312

17  Croatia: 17,8 – 15, 9% (199o) 19, 4 – 28, 0 % (1991) 21, 7% - 38, 2% (1992) 29, 7 % - 38, 2% (1993) 28, 6% - 37, 4% (1994) 22, 7% - 32, 6% (1995)  Yugoslavia: 31, 6 % (1991) 41, 7% (1992) 54, 4% (1993) 44, 7% (1994) 40, 8% (1995) 34, 5% (1997) 34, 0% (2000) Source: ibid.

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