Systematic change in a global perspective

1. Systematic Change in
a Global Perspective
1) TRANSITION ECONOMIES: OUTPUT PATTERNS AND
MEASUREMENT ISSUES
2) INTRODUCING MARKETS: PRIVATIZATION AND THE
DECLINE OF GOVERNMENT

2. Defining Economic Transition and its importance
Transition is the process of change from one
economic system to another.
1) There is no recent example of systemic
change more expansive and pervasive
than the contemporary shift of the
socialist command systems to market
arrangements.
2) A significant number of systems have
undergone transition
3) Transition generated a new interest and
fundamental reassessment of the role
of institutions in explaining
performance across economic
systems.

3. Defining Economic Transition and its importance
4) A major result of transition has been the
establishment of databases heretofore
unknown in the field of comparative economic
systems.
5) Although many in the early years of transition
thought that the transition process would be
relatively rapid, in reality transition has been
a
lengthy and complex process taking place in
highly varied settings with differing
outcomes.
6) The results of our analysis of transition
economies
can also be useful for the analysis of other
economies.

4. 3 Main Explanatory Forces
1) Initial Condition
- conditions prevailing at the onset of transition
-distortion: differences in structure and allocation of resources
-structural distortions: a type of distortion usually related to sectoral
shares in the economy.
2) Policy measures
- factors that can be changed without changing the underlying
economic system
3) Environmental factors
- country size, geographic features, resource endowments

5. Structural Differences between Command
and Market Economies
A plus (þ) indicates an above-normal share; a minus () indicates a
below-normal share.

6. Why do these initial conditions, which differ widely
from market patterns, matter?
They matter because as markets are introduced, one can expect allocation patterns under different
systemic arrangements and different policies to revert to more “normal” patterns—that is, patterns
that resemble long-term market outcomes. Thus, one can argue that the more serious the distortions,
the greater the distance that an economy must travel to reach market dimensions, and thus, the
more difficult the transition process will be. In part, the magnitude of these distortions reflects the
length of time that socialist arrangements prevailed, although other factors are also important.

7. Can the effect of initial conditions—and thus
distortions—be measured?
The answer is yes, but the task of
defining, measuring, and accounting for
the impact of these distortions is
difficult.

8. Fixed-effects model
A fixed-effects model is a statistical model in which the model parameters are fixed or non-
random qualities. This is in contrast to random effects models and mixed models in which all or
some of the model parameters are random variables.

9. Problems of Specification and Estimation
Specification – a form taken by a model that relates a result to a series of explanatory variables.
Endogenous variable—In an economic model, a variable whose value is explained within the
model being studied.
Exogenous variable—In an economic model, a variable whose value is explained outside the
model being studied.

10. Economic Growth and Output Levels in
Transition
First, although we should be careful “selecting” periods in which we examine transition performance,
the modeling effort is complicated by the fact that the patterns of output change clearly differ
between the early years of transition and the more recent years.
Second, it is evident that country responses to the transition process have been quite different
from one country to another. In this sense, country effects are important in a modeling effort.
Third, it is necessary to emphasize that almost all of the caveats that we discussed when examining
approaches to modeling are in fact relevant. We need to bear this fact in mind as we examine the
empirical literature.

11. Economic Growth and Output Levels in
Transition
Fourth, although generalizations can be made, it is clear that “the devil is in the details.” Analysts have
quite different results looking at similar issues but with different data sets, specifications, and modeling
techniques.
Fourth, although generalizations can be made, it is clear that “the devil is in the details.” Analysts have
quite different results looking at similar issues but with different data sets, specifications, and modeling
techniques.
Fifth, it is evident that many of the forces that we would expect to be positive with regard to the
growth experience are in fact positive. For example, institutional development (a legal framework),
privatization, liberalization, and the development of markets and policy development all seem to
influence growth in a positive fashion, whereas not unexpectedly factors such as inflation are
generally negative influences.

12. Summary
• The measurement of performance frequently identifies those forces thought to affect the growth of output:
differences in starting positions (initial conditions and distortions inherited from the command era), policy
differences, and country effects.
• It is hard to characterize these variables—initial conditions, policy variables, and country effects—in such a way
that a more formal statistical investigation can be conducted. In addition to both theoretical and econometric
issues, we have emphasized the difficulties of working with data from the transition era, and especially the issues
related to the assessment of transition performance over time.
• We have examined the forces leading to the decline of output in transition economies, emphasizing both supply
and demand forces and other factors, such as the collapse of command instructions and the absence or slow
emergence of price and other market-type information signals.

13. Summary
• The empirical evidence on economic growth suggests limitations on the achievement of convergence with
market economies. However, there is support for the positive influence of variables such as privatization and
institutional development, and an indication that forces such as inflation inhibit economic growth.
At the same time, many of the difficulties of modeling economic growth are conformed and emphasized
by the authors of empirical studies.
• Assessment of transition results is complicated by the presence in many cases of a non-monetary barter
economy. Empirical evidence suggests that this presence of a non-monetary economy is greater in the CIS
countries, especially Russia, and can be explained by the absence of appropriate market-type organizational
arrangements, the limited role of financial markets, and the holdover of patterns of exchange that prevailed
during the command era.

14. Introducing Markets: Privatization
and the Decline of Government
The most fundamental element in the identification of differing economic
systems is property rights. The cornerstone of a market economy is private
property, based on clearly identified property rights (claims for the
ownership and use of real property) and a system of markets and exchange
resulting in prices that appropriately reflect relative scarcities in both factor
and product markets.

15. Privatization in Transition
The story of privatization is much more significant than one might suspect from the
contemporary transition setting. As we have emphasized before, the role of the state in the
process of economic development is of great importance. It is especially clear to systems
analysts because differing roles of the state imply very different organizational arrangements
and hence different economic systems. Traditionally, the role of government in an economy has
been a key element in system classification.

16. State-Owned Enterprises
State-Owned Enterprises (SOEs)—firms or businesses whose assets are owned by the state—
are replaced by private firms, the contemporary setting of privatization extends far
beyond the transition economies.

17. Social contract
Social contract—the relationship between the people and the
state as defined through institutions, laws, policies, etc.—and
thus will differ according to cultural and historical settings.

18. What are the traditional explanations for the varying roles of
government in the economic systems of different nations?
Traditionally, government involvement has been justified on the grounds of either equity
(fairness) or efficiency (the relationship between inputs and outputs). From an equity viewpoint,
government is involved in redistribution, usually sanctioned by society through a voting process.
From an efficiency standpoint, much of the contemporary literature on privatization argues that,
other things being equal, production can be conducted more efficiently by private than by non-
private enterprise.

19. Conclusion
In a market economy, privatization is conceptually feasible, and easier to achieve, under a variety of
conditions.
First, most privatization in market economies is not mass privatization but rather selective
privatization, sometimes related to production but often related to services, regulation, and other
government activities.
Second, the product or service to be privatized can often be clearly identified. Thus it is not surprising
that in the early stages of privatization in market economies, services such as trash collection,
janitorial duties, security services, and the like can be readily privatized. In such cases, the product or
service is known and most often homogeneous.
Third, in the market setting, the legal infrastructure is critical in that a contract can be written, and
performance in the fulfillment of the contract can be monitored and ultimately enforced. Note, then,
that even in cases where the provision of a service is being privatized, rather than an asset’s (such as
a firm) being sold, the process is relatively clear. Fourth, markets and financial arrangements exist, so
it is possible to make reasonable decisions based on cost/ benefit analysis, including some
assessment of both private and social costs and benefits.

20. Stages of Privatization
Develop a
legal
framework
Identify
properties to
private
Create a
corporate
structure
Distribute
Corporate
Shares
Restructure
Enterprises

21. Privatization Process Explained
Although the process of privatization has varied from one transition setting to another, two
major approaches (or combinations of these approaches) dominated.
In direct sale (the transfer of ownership directly from one person to another usually absent
intermediate mechanisms, such as an auction) of enterprises to buyers, sale could take
place either through outsider privatization (the sale of an enterprise to persons not connected
in any way to the enterprise) or through insider privatization, (the sale of an enterprise to
those who are employed by the enterprise). The actual method of sale could vary from a
direct negotiation between buyer and seller to an auction or other indirect method.

22. Privatization Process Explained
A second major approach to privatization was the use of vouchers, which are documents
that represent an ownership claim that can be executed to acquire the shares of an
enterprise. Note that these approaches might overlap in that vouchers could be used by
“insiders” to gain control of enterprises in which they were employed.9 Also, depending
on the rules established, an employee of one firm who possessed a voucher could use
this mechanism to purchase shares in a different firm.

23. Summary
 Privatization is much more than a process to change property-holding arrangements.
 Privatization implies fundamental changes in the role of the state in the economy.
Although there have been significant country differences in privatization, the process has generally
involved a series of stages: development of a legal framework, identification of properties to be
privatized, creation of a joint stock framework, and, finally, sale of the properties.
Early research interest focused on an overall assessment of the growth of the private sector in transition
economies, whereas the contemporary literature focuses on restructuring, or changes in corporate
governance (that is, changing resource allocation and decision making in the enterprise) with the
objective of improving efficiency.
Privatization has been broadly achievable, although controversial, and the impact and results of
privatization have been much more evident in industrialized and emerging market economies than in
transition economies.

24. Summary
 The extent of privatization has been significant in many of the transition economies; assessing the
extent and meaning of restructuring has been more difficult. In the transition economies, new (outsider)
ownership enhances privatization, as does devoting attention to management and to the necessary
financial and legal arrangements.
 In recent years, the emphasis has been on the development of competitive product markets and on the
emergence of new institutions, such as financial markets capable of providing capital to restructuring
enterprises. The development of a commercial legal framework is an important element in the transition
settings. There remain, as always, important differences among countries, regions, and industrial sectors.