Plan&Market  Eastern Europe in Transition

 

WHY COLLAPSE?
 

The first question which comes to my mind is 'Why did communism collapse?' This question was rarely asked, perhaps because the collapse and its abrupt arrival appeared ex post inevitable. The answer to this question may hold important clues for the understanding of the bewildering developments in today's Eastern Europe. 

 

Let me state three - not necessarily exclusive - hypotheses about the possible reasons for collapse.

A1:  

The unsoundness of central planning hypothesis:

administrative central planning was unable to reach a sufficient level of economic coordination so that the economic collapse as well as the ensuing political collapse were inevitable.

A2:

 

The insufficient dynamism hypothesis:

although central planning may have been able to achieve a certain basic level of economic coordination it had not been able to generate such vigorous technical change and innovations as the free market economy. As a result the centrally planned economies lagged behind the West in the rate of economic growth. Communism collapsed because the population was not willing to tolerate the increasing gap in the standard of living any further.

A3: 

Bad implementation hypothesis:

there is nothing wrong with the idea of socialism and central planning, it was just badly implemented.

The next set of hypotheses relates to the difficulties of economic transformation.

B1: 

The improved allocative efficiency hypothesis:

 the transition to a market economy will improve incentives and lead to a more efficient allocation of resources.

B2:

The misdiagnosis hypothesis:

official statistics misrepresent reality. In particular, they fail to sufficiently capture spontaneously growing private economic activity and also overstate the decline in real consumption.

B3: 

The vacuum or discoordination hypothesis:

according to this hypothesis, market economy and command economy are two distinct coordinative mechanisms that work on completely different principles. During transition one has to be dismantled before the other can be created, leading to a temporary discoordination.

B4:

The cost of transition hypothesis:

transition to a market economy requires reallocation of resources, retraining people and creating new institutions. All that is costly and time consuming.

B5:  

The fragmentation hypothesis:

the end of communism resulted in the breakup of COMECON and the dissolution of multinational states. Fragmentation cut the supply links and reduced the internal markets for domestic products.

B6: 

The demand 'pull-down' hypothesis:

uncertainty in relation to the transition caused a radical decline in investment which together with the already mentioned decline of foreign demand and real consumption led to diminished aggregate demand.

B7: 

The wrong transition strategy hypothesis:

politicians who obtained power were either incompetent or wrongly advised and chose incorrect transition strategies.

 

Several if not all of the B hypotheses may actually be valid at the same time. The point is not to accept or reject any of them but rather to show how much and in what time frame each of them contributed to the perils of transition. This knowledge is relevant especially for judging the appropriateness of various transformation strategies. The problem is, of course, that it might be impossible to separate the effect of the factors mentioned from the effect of the strategy itself. The hypothesis B7 states that wrongly chosen strategies may have been a significant cause of the economic decline during transition. This could also explain why different countries did not suffer equally.

  It is quite obvious that no country escaped a significant decline in GDP and industrial production, increase of unemployment and at least a temporary surge of inflation. It is, however, equally clear that the extent of these setbacks was quite different in different countries. For example the estimated fall in GDP amounted only to 20-25 per cent in Visegrad countries (Poland, the Czech Republic, Slovakia, Hungary) and Slovenia, while it reached 40-60 per cent in other East European countries and the successor states of the former Soviet Union. Even larger differences have been observed in rates of inflation and unemployment. Are these disparities owing primarily to different strategies used or do they have some other causes? Three additional hypotheses can be formulated to explain the differences mentioned.

C1: 

Geographic location hypothesis:

East European countries located in close proximity to Western Europe suffered less.

C2: 

Level of economic development hypothesis:

more developed countries could make the transition to market economy with lower costs.

C3: 

Historical and cultural traditions hypothesis:

historical experiences, customs, beliefs and attitudes made some nations better inclined to part with communism and accept a market system.

 

 

 

 

 

 

 

 

 

 

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