The transition from socialist economy to capitalsit economy modelled as a physical system

1. The Fourth Annual EEFS Conference,
Faculty of Economics, University of Coimbra, Portugal
19-22 May 2005
Modelling the transition from a socialist to
capitalist economic system
Ivan O. Kitov
e-mail - ikitov@mail.ru
http://www.ecokitov.narod.ru

2. EU - big hopes and deterministic economic growth
Several Central and East European countries joined the EU in 2004
and some more will join it in 2007 ...
Is there a reasonable economic policy?
EEFS-2005 Conference
“Focus on the changes we observe in the global economy and
on the European Integration process”
- Macroeconomic issues and policy
- Growth and development
- Regional economics and policy
- New political economy

3. Transition from a socialist to capitalist system:
history and future
1. Was economic growth in socialist countries at its potential level
between 1950 and 2003? Comparison with capitalist countries.
2. Is economic performance of developed capitalist countries and
socialist countries predefined?
3. Modelling the transition process between two stationary systems:
socialist and capitalist
4. Are all the Former Socialist Counties capitalist already?
5. What is the economic future of the European and East European
countries compared to that of the USA and leading European
countries?

4. per capita real GDP: socialist vs. capitalist countries
35,000
per capita GDP, $ (1990)
30,000
25,000
20,000
15,000
Bulgaria
Czechoslovakia
Hungary
Poland
Romania
Yugoslavia
USSR
USA
France
Austria
Greece
Japan
10,000
5,000
0
1940
1950
1960
1970
1980
1990
2000
calendar year
2010
Was economic growth in socialist countries at its potential level between 1950 and
2003?
(Data Source: Groningen Growth and Development Centre and The Conference Board,
Total Economy Database, January 2005, http://www.ggdc.net )
Period of socialist system growth between 1950 and 1989
11/08/13
Modelling the transition from a socialist to capita
4

5. 0.050
mean GDP growth rate
0.040
0.030
0.020
0.010
Au
st
Be ria
lg
D iu m
en
m
a
Fi rk
nl
an
Fr d
an
G ce
re
ec
e
N
et Ita
he l y
rl a
n
N ds
or
w
Po ay
r tu
ga
Sp l
Sw a in
Sw ed
i tz en
er
la
n
Tu d
rk
ey
U
.K
.
U
SA
C
ze Bu
ch l ga
os ria
lo
va
H k ia
un
ga
r
Po y
la
R
o nd
Yu ma
g o n ia
sl
av
ia
U
SS
R
0.000
Average growth rate in the socialist countries is close to that of
most developed countries but lower than that in Spain, Portugal
and Greece
11/08/13
Was economic growth in socialist countries at its potential level between 1950 and
2003?
Mean per capita GDP growth rate between 1950 and 1989
Modelling the transition from a socialist to capita
5

6. d(GDP(i))/dt=0.5(N(i)-N(i-1))/N(i-1)+1/Tcr(i-1)
•
•
d(GDP(i))/dt is the real GDP growth rate for time interval dt=i-(i-1)
N(i) is the number of people of some defined age, specific for each country
at time i,
Tcr(i)=Tcr(i-1)sqrt(1+d(GDP(i))/dt-dNT/NT)
•
•
(1)
(2)
Tcr is the duration of the period of mean income growth with increasing work
experience
dNT/NT is the relative change of total population above 15 years of age
11/08/13
Is economic performance of developed capitalist countries and socialist countries predefined?
Defining relationships
for capitalist economic growth
Modelling the transition from a socialist to capita
6

7. (Data Source: The U.S. Census Bureau, www.census.gov )
Tcr
Tcr increases with economic growth
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Is economic performance of developed capitalist countries and socialist countries predefined?
Mean personal income vs. work experience
Modelling the transition from a socialist to capita
7

8. (Data Source: U.S. Department of Commerce, Bureau of Economic Analysis,
National Income and Product Accounts Table. Table 1.1.5, www.bea.gov )
0.06
real GDP average 10-year window
1/Tcr
GDP growth rate
0.05
Степенной (real GDP average
10-year window)
0.04
0.23
real GDP per Capita +0.15
1/Tcr-dN/N+0.15
0.03
0.02
0
10000
20000
30000
40000
per capita GDP, US dollars (1999)
50000
GDP growth rate
0.21
Степенной (real GDP per Capita
+0.15)
0.19
0.17
0.15
0
10 000
20 000
30 000
40 000
50 000
per capita GDP, US dollars (1999)
The economic growth trend line and predicted GDP behaviour coincide
11/08/13
Is economic performance of developed capitalist countries and socialist countries predefined?
Real GDP growth rate in the USA: 1930 to 2003
Modelling the transition from a socialist to capita
8

9. Per capita GDP growth rate in Japan, France, Austria, and Greece:1950 to 2003
France
per capita GDP + 0.1
USA (1/Tcr-dN/N+0.1)
Степенной (per capita
GDP + 0.1)
0.2
GDP growth rate
GDP growth rate
per capita GDP + 0.1
USA (1/Tcr-dN/N+0.1)
0.25
0.15
Степенной (per capita
GDP + 0.1)
0.15
0.1
0.05
0.1
0
5 000
10 000
15 000
20 000
per capita GDP, US dollars (1990)
25 000
0
5 000
Austria
per capita GDP + 0.1
0.25
USA (1/Tcr-dN/N+0.1)
Степенной (per capita
GDP + 0.1)
GDP growth rate
GDP growth rate
USA (1/Tcr-dN/N+0.1)
0.15
0.1
0
5 000
10 000
15 000
20 000
per capita GDP, US dollars (1990)
25 000
Степенной (per capita
GDP + 0.1)
0.2
0.15
0.1
-1 000
1 000
3 000
5 000
7 000
9 000 11 000
per capita GDP, US dollars (1990)
13 000
Developed capitalist countries follow the US economic path
per capita GDP growth rate = 21.72x(per capita GDP)-0.7052
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25 000
Greece
per capita GDP + 0.1
0.2
10 000
15 000
20 000
per capita GDP, US dollars (1990)
15 000
Is economic performance of developed capitalist countries and socialist countries predefined?
Japan
Modelling the transition from a socialist to capita
9

10. The transition schema
1990
hidden economy
1>p>0
capitalism
0<q<p
2005
• Simultaneous processes of decay and growth
• Conservation laws for population (nobody disappears or reappears)
and for performance (predefined capitalist growth)
11/08/13
Modelling the transition process between two stationary systems: socialist and capitalist
socialism
Modelling the transition from a socialist to capita
10

11. M(t)=Ms(t)+Mc(t)
Ms(t)=M0sexp(-α st)
Mc(t)=(1-M0c)(1-exp(-α ct))exp(αt)
M(t) - total per capita GDP at time t,
Ms(t) and Mc(t) - portions of the socialist and capitalist systems
in the total per capita GDP, M(t),
M0s and M0c - initial portions of the socialist and capitalist system in the
total per capita GDP, M(0), (M0c=0, M0s=1)
α s - dissipation factor of the socialist system decay
α c - dissipation factor of the capitalist system growth
α - observed economic trend of the capitalist system growth
The model contains only three defining parameters
11/08/13
Modelling the transition process between two stationary systems: socialist and capitalist
Defining relationships for the transition from
a socialist to capitalist system
Modelling the transition from a socialist to capita
11

12. Socialist system decay
Ms(t)=M0sexp(-α st)
M0 s
Growth of capitalism
Mc(t)=(1-M0c)(1-exp(-α ct))exp(αt)
Hidden economy
Mhidden(t)=1-Ms(t)-Mc(t)
0 (no socialist elements)
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1 (pure capitalism)
Modelling the transition process between two stationary systems: socialist and capitalist
Per capita GDP in a socialist country
Modelling the transition from a socialist to capita
12

13. Modelling the transition period in Russia
Are all the Former Socialist Counties capitalist already?
Current status: almost no socialism (2%)
65% of population in the capitalist system
33% not in either of the main income distribution systems
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Modelling the transition from a socialist to capita
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14. Modelling the transition period in Russia
2.
•
•
Relatively fast decay of the socialist system and slow build up of the
capitalist system presence, αc/αs=0.275
Two sources of the current economic growth in Russia:
increase of the capitalist system presence (2.2% per year)
internal growth of the capitalist system with an economic trend of 3.3%
•
Are all the Former Socialist Counties capitalist already?
1.
current per capita GDP growth rate = 1.022x1.033=1.073=7.3%
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Modelling the transition from a socialist to capita
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15. Modelling the transition period in Hungary
Are all the Former Socialist Counties capitalist already?
Current status: no socialism (~0.15%)
>97% of population in the capitalist system
~3% not in either of the main income distribution systems
11/08/13
Modelling the transition from a socialist to capita
15

16. Modelling the transition period in Hungary
Are all the Former Socialist Counties capitalist already?
1.
2.
•
Very fast decay of the socialist system and fast growth
of the capitalist system presence since 1990, αc/αs=0.56
Only one sources of current economic growth in Hungary:
internal growth of the capitalist system ~ 2.0% per year
11/08/13
Modelling the transition from a socialist to capita
16

17. Modelling the transition period in Poland
Are all the Former Socialist Counties capitalist already?
Current status: no socialism (<0.1%)
>97% of population in the capitalist system
~3% not in either of the main income distribution systems
11/08/13
Modelling the transition from a socialist to capita
17

18. Modelling the transition period in Poland
Are all the Former Socialist Counties capitalist already?
1.
2.
•
Very fast decay of the socialist system and fast build up
of the capitalist system presence since 1989, αc/αs=0.59
Only one sources of current economic growth in Poland:
internal growth of the capitalist system ~ 2.9% per year
11/08/13
Modelling the transition from a socialist to capita
18

19. Modelling the transition period in Slovenia
Are all the Former Socialist Counties capitalist already?
Current status: no socialism (<1%)
>93% of population in the capitalist system
~6% not in either of the main income distribution systems
11/08/13
Modelling the transition from a socialist to capita
19

20. Modelling the transition period in Slovenia
2.
•
•
Relatively fast decay of the socialist system and fast growth
of the capitalist system presence since 1989, αc/αs=0.55
Two sources of the current economic growth in Slovenia:
increase of the capitalist system presence - 1.1% per year)
internal growth of the capitalist system - 2.0% per year
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Are all the Former Socialist Counties capitalist already?
1.
Modelling the transition from a socialist to capita
20

21. Per capita GDP growth rate: observed and predicted
0.2
theory
0.15
modelled growth rate
Степенной (US trend (1/Tcr-dN/N))
0.1
Kazakhstan
Tajikistan
0.05
Estonia
0
0
5000
10000
15000
per capita GDP, $ (1990)
20000
Are all the Former Socialist Counties capitalist already?
per capita GDP growth rate
US trend -(1/Tcr-dN/N)
1. The capitalist growth rate for the studied countries is below
the theoretical value except Estonia and Kazakhstan
2. East and Central European countries show per capita
GDP growth between 1.5% and 3.0%
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Modelling the transition from a socialist to capita
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22.
per capita GDP, US$
αs
αc
Poland
8080
0.39
0.23
11/08/13
α
0.029
α-theory
α c/α s
0.038
0.590
Modelling the transition from a socialist to capita
22

23. Assumption: Theoretical growth rate from 2005
1.
2.
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Constant lag of the absolute per capita GDP of ~$23000
Decreasing ratio of US/Hungary per capita GDP
What is the economic future of the Central and East European countries compared to that of the
USA and leading European countries
Future for Hungary
Modelling the transition from a socialist to capita
23

24. Constant lag of about $27000
Modelling the transition from a socialist to capita
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11/08/13
What is the economic future of the Central and East European countries compared to that of the
USA and leading European countries
Future for Poland

25. Conclusions
1.
2.
3.
4.
5.
6.
The transition process from socialism to capitalism can be described by a
model defined by only three parameters having simple physical
interpretations
Central European countries have completed transformation into capitalist
countries
The countries of the FSU are building the capitalist system with a
considerable lag
Most of Central and East European countries currently exhibit economic
underperformance, except for Estonia (?)
The best case scenario guarantees in future a constant per capita GDP lag
relative to that of USA
An increasing absolute per capita GDP lag relative to that of USA will be
observed in the case of economic underperformance
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Modelling the transition from a socialist to capita
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