Tanya L. Porquez
Report on the paper
The Unwinding

of Central Planning

in Eastern Europe
by Paul G. Hare

and Michael Kaser







This article from the Economic Journal is divided into two parts.  The first part is entitled, "From Central Planning to Market Economy:  Some   Microeconomic Issues" and is written by Paul G. Hare.  In this paper, Hare examines the differences between a centrally planned economy versus a market economy, particularly concentrating on  microeconomic issues.  Hare divides his paper into five main topics. 

The first of which entitled "the Role of Markets" talks about how it is important to breakdown the vertical network between enterprises and the groups that supervise them.  Also, Hare suggests that to prevent the "Rent-seeking" behavior  of enterprises, an institutional framework should be set up. Concerning market reforms, there should be more properly functioning markets and markets should be created or reestablished for foreign exchange, in addition to changes within the institution itself.

The second section  is entitled "Hungary: Development of Competition" states that despite  several of the new reforms Hungary has undergone, there  are still several factors that prevent it from being a strong economic  competitor.  For example, there are distortions in the pricing, credit and subsidy systems, mismanaged aspects of trade and soft budget constraints. 

The third section is entitled "Privatization and the Problem of Large Enterprises." It discusses the problems of shortages, the consequence of the paternalistic state and  soft budget constrains as related to large business enterprises and privatization. 

The next section discussed by Hare is "Transition to the Market."  Here the usage of resources and investment is discussed in the context of good investment making for the promotion of privatization and development of a more competitive market.  Later, the role of reforms such as price  and  trade liberalization, standardization of tax and subsidy rules and the overall dismantling of the Vertical system are also discussed.  He states that Hungary should begin domestic liberalization first, not worry about monopoly regulations, except for public utilities, reduce shortages by increasing wages proportionally to prices, for starters.  Hare says that, "As firms gain confidence in a market-type environment, trade liberalization could then be pursued fairly soon.  Much however, will depend on how quickly firms develop entrepreneurial skills needed to function in the new environment."

In conclusion, Hare admits to being in the "minority view" by stating that, "Hungary may do best by liberalizing domestically first (with an accompanying devaluation to keep domestic and foreign prices roughly in line),  without worrying too much about regulation of monopoly except possibly for the major public utilities."  Then and only then, after a market-type environment is more stable and confident, can the liberalization of trade take place.  Hare also submits that the best way for the West to aid them is through technical assistance and training in finance, marketing, accounting and other business related topics.

The second part of the Policy Forum focuses on  Macroeconomic issues. Written by Michael Kaser, the article entitled, "The Technology of Decontrol: Some Macroeconomic Issues," discusses the way Eastern European countries turned to capitalism after the collapse of Communism and Central Planning. The first part of the subtitled "Authoritarians and Central Planning" talks about the conditions of the Soviet Block countries before the transformation.  The Second section called "the Economic Practices to be Changed" does exactly that. It describes the Soviet structure and style of economics and how  central planners conformed to the ideas of soft budget constraints and  nurtured the sociopolitical and economic relationship with the Paternalistic state. 

   The final three sections deal with the restructuring of the economy as a whole.  The sections are entitled, "The Rectification of Disequilibria", "Repricing and Desubsidation" and "Progression to the Market." In section three, Kaser states that  in order to restore equilibrium soft budget constraints must be tightened and privatization of state enterprises must be allowed.  For the repricing and desubsidisation of markets, Kaser states that, "All reformist governments recognize the necessity of proceeding to price determination by a market:  the debate concerns only the time horizon and the pace at which individual commodity prices will be controlled or desubsidized." The final section is generally  how Kaser believes the Eastern European country should proceed now that they have made the decision to move towards a market  economy.  He suggests that the change should begin with the election of democratically elected government since this will purge the country of the old ways of central planning and give it a new start.  Also, this will give the new government more support for their new programs and during times where there are economic hardships as new reforms are implemented.  Many times during this stage, an unpopular combination of incomes policy and monetary restraint are used to aide in restabilization. Other ways Kaser mentioned in his paper was to begin privatization of the former state-owned companies and also to eliminate inefficient enterprises.  Overall, Kaser is a proponent of shock therapy stating that, "the speedy transfer of domestic factors must be the main resource" for debt-service restructuring and economic recovery under the market system. 

My opinion of the Article: This Policy Forum discussed two very important issues concerning transformation strategies for eastern Europe.  The articles that I summarized contained many interesting facts.  The first article, by Hare especially.  Hare is a proponent of Gradualism  and in his fairness  to both of the methods of transition, I initially believed him to suggest that shock therapy was his mode of choice.

Hare has stated that one of the issues that quickly transforming countries encounter is whether or not they should begin macroeconomic stabilization reforms and microeconomic stabilization reforms concurrently. I  think that reforms is not the best way to put it.  The individual countries are  completely changing  the stabilization mechanisms, then why not change the system all at once since you will not be reforming the Central Plan method but totally developing it into a western style system.  This is the problem the gradualist approach,  they do not want to change the centrally planned way, but modify it into something new.  Also those in favor of gradualism take a "wait and see" attitude towards the economy-- in hopes to see if the markets can correct themselves.  Also, Hare mentions that in his paper that we should not worry too much about the regulation of monopolies, but Kaser contends that, "Progress towards a 'normal market economy of the western type' became possible with political demonopolization in Eastern Europe in 1989.(604)"  The breaking of the influence of monopolies on markets is important for the opening up of new markets for goods, capital and trade.

I personally, believe that the shock therapy method may be the most productive way of transforming the economy from the Centrally planned type.  Although I do feel that the gradualist approach does have its good points and intentions I just feel that if a country has a clear economic goal and a sensible plan of action, then they should proceed.  The fluctuations in the economy and in the welfare of the citizens are destined to occur, as  there will also be those who dislike the new reforms, so it is my belief that in the long run a quick and drastic change to an economy is a good idea rather than prolonging the imminent change.    

The Unwinding of Central Planning in Eastern Europe, by Paul G. Hare and Michael Kaser. The Economic Journal, London: 100.401. (1990). pp577-613.



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