1. TITLE Eastern Europe and Former Soviet Union Class 1

3. General Information q Approximately 26 separate economies now q About 430 million q roughly 2/3 in former Soviet Union q within Eastern Europe q Poland (40M); Romania (25M)

4. Common theme Transition from socialist to market economies Began in 1989 in Poland

5. Status on the eve of transition UK, Italy Portugal, Greece Russia (1988)

6. Substantial gap widening from early 1970s Annual growth rate

7. Krugman’s perspective q Early growth was primarily due to growth in economic inputs q a kind of economic growth that is self-limiting q as opposed to growth attributable to increases in output per unit of input

8. Why was state-led industrialization adopted? q Use the power of the state to mobilize financial resources for rapid investment, particularly in basic industry q state owns the capital and can choose how to reinvest it.

9. Investment ratios, selected countries

10. Other motivations q Belief that state-led growth would be more equitable: q capital income would be shared by the whole society, not a privileged few.

11. How did decisions get made regarding q What goods and services got produced q How the major factors of production got allocated q Can’t rely on market mechanisms q balances are achieved by administrative procedures

12. CPSU sets output targets for crucial commodities GOSPLAN sets output targets for 2-300 product groups Projected Supplies Estimated Demands Material Balances Estimate input reqs. Central ministries set production targets Enterprises Estimate input reqs.

13. Remedies for Deficit Commodities q Increase planned output q increase imports q draw upon stocks q reduce inter-industry demands q reduce final (household) demands

14. Pre-1990 a largely closed economic bloc q Most trade within the bloc q monopolistic state agencies controlled all foreign exchange transactions q total protection against foreign competition despite low formal tariff and non-tariff barriers

15. Why the unsatisfactory growth and well-being performance? q Jan Winieki. 1986. Are Soviet-type economies entering an era of long term decline? Soviet Studies 38(3):325-348. q Jeffrey Sachs. 1996. Notes on the life-cycle of state-led industria- lization, Japan and the World Economy 8:153-174.

16. A fundamental problem q No private owners to monitor the performance of workers and managers q can’t rely on managers. Have little interest in resisting worker demands for higher compensation q state bureaucracy has frequently not performed this role well

17. Soviet-style Economic Organization Incentive Structure Inflexibility of institutional structure Lack of Specialization Slowness to Innovate Ability to Mobilize Resources for Large Projects Jan Winieki’s model

18. Sachs’ elaboration on this theme q State enterprise was most successful in promoting mass production, homogeneous heavy industry and least successful in services q Not surprising, growth rates slowed when they reached development levels where specialized service activity tends to grow rapidly.

19. Symptoms of these weaknesses q High resource intensity q deteriorating investment performance q bloated share of industrial sector in GDP q increasing demand for imports of raw materials, parts and components, technology q deteriorating export performance