ECONOMICS OF TRANSITION

May 15 – July 8, 2001

prof. Vladimir Popov
Nakhimovsky pr, 47
Office: 905
Tel: 332-4337
vpopov@nes.ru

The overall aim of this course is to understand the processes of transition from a socialist, centrally planned economy to a capitalist mixed market economy, using the Russian economy as the primary example. Extensive comparisons will be made with the experience of other economies in transition.

After surveying the economics of transition in the perspective of comparative economic systems, we shall look at Soviet economic history and at basic features of the Soviet centrally planned economy. We shall then examine current transition problems, such as macroeconomic stabilisation and industrial policy, privatisation strategy and experience, emerging banking and financial systems.

The conventional wisdom (as summarised, for instance, in the World's Bank "1996 World Development Report": From Plan to Market) suggests that differences in economic performance are associated mostly with "good" and „bad" policies, in particular with the progress in liberalisation and macroeconomic stabilisation: countries that are more successful than others in introducing market reforms and bringing down inflation are believed to have better chances to limit the reduction of output and to quickly recover from the transformational recession. In general this may well be true, but „the devil is in the details", which often do not fit into the generalisation and make the whole explanation look trivial.

The final task of the course is to examine to what extent differences in economic performance in post-communist countries during transition are associated with:

Components of the final grade:
Mid-term test, in-class (40% of final grade) - questions 1 to 35 (approximately).
Final exam (60% of final grade) - all questions.
Examples of questions and problems at the exam



Week 1. Shock therapy versus gradualism. Transformational recession. Transition strategies and performance.
А.Илларионов. Экономическая политика и экономический рост. - ЭКО, 1997(?), №10. В.М.Полтерович. Трансформационный спад в России. Экономика и математические методы, 1996, т. 32, вып.1, c. 54-69.
Kornai, Janos, Transformational Recession: The Main Causes. Journal of Comparative Economics, No. 1, 1994, pp. 39-63.
World Development Report. From Plan to Market. World Bank, 1996, Ch. 1,2
Stiglitz, Joseph E. WHITHER REFORM? Ten Years of the Transition. WORLD BANK
ANNUAL BANK CONFERENCE ON DEVELOPMENT ECONOMICS, 1999. Keynote Address, World Bank (http://www.worldbank.org/research/abcde/washington_11/pdfs/stiglitz.pdf)
Fischer, Stanley and Sahay, Ratna. Taking Stock. - Finance & Development, September 2000, Volume 37, Number 3 (http://www.imf.org/external/pubs/ft/fandd/2000/09/fischer.htm). The full version is at (http://www.imf.org/external/pubs/ft/wp/2000/wp0030.pdf) - IMF Working Paper WP/00/30.
Еslund, Anders. Why Has Russia's Economic Transformation Been So Arduous? Paper prepared for the Annual World Bank Conference on Development Economics, Washington,
D.C., April 28-30, 1999. (http://www.worldbank.org/research/abcde/washington_11/pdfs/aslund.pdf)
Roland, Gerard. Transition and Economics: Politics, Markets, and Firms. MIT Press. Cambridge, MA, London, 2000, ch. 1,7,8, 13.

Week 2. Transition economies in the framework of comparative economic systems. Market socialism. Types of planning (directive vs. indicative), SOFE
Gregory, Paul and Stuart, Robert Comparative Economic System, Houghton Mufflin Company, 5th edition, 1995, Ch. 6,7.
Gregory, Paul and Stuart, Robert. Russian and Soviet Economic Performance and Structure, Harper Collins College Publisher, 6th edition, 1998, Ch. 1, 12, 13.
Kornai, J. The Socialist System. The Political Economy of Communism. Princeton, NJ, 1992, Ch., 21. pp. 474-512.

Week 3. Review of Soviet economic history - War Communism, NEP, Command economy, Industrialisation Debate. Soviet Statistics.
Gregory, Paul and Stuart, Robert Comparative Economic Systems by, Houghton Mufflin Company, 5th edition, 1995, Ch. 11, 12.
Gregory, Paul and Stuart, Robert. Russian and Soviet Economic Performance and Structure by Harper Collins College Publisher, 6th edition, 1998, Ch. 2-5.
Shmelev, Nikolai and Popov, Vladimir. The Turning Point: Revitalizing the Soviet Economy. Doubleday, 1989, Ch. 1-3; In Russian - Шмелев Н., Попов В. На переломе: экономическая перестройка в СССР. М., Издательство АПН, 1989, гл.1-3.

Week 4. CPEs: industrial organisation and structural inefficiencies.
Gregory, Paul and Stuart, Robert Comparative Economic Systems by, Houghton Mufflin Company, 5th edition, 1995, Ch. 11, 12.
Gregory, Paul and Stuart, Robert. Russian and Soviet Economic Performance and Structure by Harper Collins College Publisher, 6th edition, 1998, Ch. 6-7, 9, 10-11.
Shmelev, Nikolai and Popov, Vladimir. The Turning Point: Revitalizing the Soviet Economy. Doubleday, 1989, Ch. 4-7; In Russian - Шмелев Н., Попов В. На переломе: экономическая перестройка в СССР. М., Издательство АПН, 1989, гл.4-7.

Week 5. Monetary overhang during Gorbachev reforms (1985-91). Macroeconomic stabilisation and currency crises in transition economies.
IMF, World Bank, OECD, EBRD. A Study of the Soviet Economy, 1991, Vol. 1,2,3, Ch. III.1 - III.3.
World Development Report. From Plan to Market. World Bank, 1996, Ch. 1,2, 6,7.
Popov, V. The Rise and Fall of the Non-monetary Economy in Russia: Puzzles Multiply Faster Than Resolved. Review of D. Woodruff's book "Money Unmade. Barter and the Fate of Russian Capitalism". - Journal of Policy Analysis and Management, May 2001.
Сергей Гуриев, Владимир Попов. Трехглавая гидра безденежья. Неплатежи, бартер, денежные суррогаты: откуда они взялись в России и как с ними бороться. - Эксперт, #9 (269) от 5 марта 2001. Полный текст: http://www.nes.ru/~sguriev/nemonetar.doc
Montes, Manuel and Popov, Vladimir. The Asian Crisis Turns Global. Institute of Southeast Asian Studies, Singapore, 1999. In Russian - Монтес, М., Попов В. "Азиатский вирус" или "голландская болезнь"? Теория и история валютных кризисов в России и других странах. М., Издательство "Дело", 1999. See also: Popov, Vladimir. Currency Crisis in Russia in a Wider Context. C.D. Howe Institute Commentary, 2000 (http://www.cdhowe.org/PDF/popov.pdf); Popov, V. Russia's Financial Collapse. - NIRA Review, Vol. 6, No. 6, Winter 1999 (http://www.nira.go.jp/publ/review/99winter/popov.html); Popov, V. Currency Crises in Russia and in Southeast Asia. Paper prepared for the conference "Transition and Reforms in Korea and Russia: A Comparative Perspective" Seoul, November 23-24, 2000 (http://www.tongilnet.net/forum3/speech_2-1.html).
EBRD Transition Report, 1997, Ch. 1,2,7; 1998, Ch. 1,2,3.
Stiglitz, Joseph E. Capital Market Liberalization, Economic Growth, and Instability. World Development, Volume 28 (6) 2000, pp. 1075 - 1086.

Week 6. Industrial restructuring, industrial policy. Privatisation strategy, financial system in transition.
World Development Report. From Plan to Market. World Bank, 1996, Ch. 8.
Popov, Vladimir. Will Russia Achieve Fast Economic Growth? - Communist Economies and Economic Transformation, Vol. 10, No. 4, 1998, pp.421-49.
EBRD Transition Report, 1997, Ch. 3-6.
World Development Report. From Plan to Market. World Bank, 1996, Ch. 3, 6.
Popov, V. The Financial System in Russia as Compared to Other Transition Economies: The Anglo- American versus The German-Japanese Model - Comparative Economic Studies , No. 1, 1999. See: (http://www.econ.cbs.dk/institutes/cees/workshop/pdf/Popov.pdf). In Russian - Попов, В. Конструктор для финансиста. Эксперт, 10 октября 1999 (http://novosti.online.ru/issue/expert/99/38/expert02.htm).
EBRD Transition Report, 1998, Ch. 5-8.
Roland, Gerard. Transition and Economics: Politics, Markets, and Firms. MIT Press. Cambridge, MA, London, 2000, ch. 4,10, 12.

Week 7. Transition theory and growth of transition economies. Political economy of reforms.
Полтерович В.М. Институциональные ловушки и экономические реформы, Экономика и математические методы, 1999, т. 35, вып.2.
Campos, Nauro F. BACK TO THE FUTURE: THE GROWTH PROSPECTS OF TRANSITION ECONOMIES RECONSIDERED. Center for European Integration Studies, August 2000 (http://www.zei.de/download/zei_wp/B00-13.pdf).
Popov, Vladimir. Shock Therapy Versus Gradualism: The End of the Debate (Explaining the Magnitude of the Transformational Recession), Comparative Economic Studies, No. 1, Vol.42, Spring 2000, pp. 1-57;
In Russian - Попов В. Динамика производства при переходе к рынку: влияние объективных условий и экономической политики (Вопросы экономики, 1998, № 7); Сильные институты важнее скорости реформ (Вопросы экономики, 1998, № 8); Шокотерапия против градуализма: конец дискуссии. - Эксперт, 21 сентября 1998, (http://novosti.online.ru/issue/expert/98/35/pereh.htm); Шокотерапия против градуализма: конец дискуссии. - Конституционное право: Восточноевропейское обозрение, No. 1 (30), 2000, с. 66-72 (http://www.mpsf.org/kpvo/kpvo.html).
See also: Popov, V. CIRCUMSTANCES VERSUS POLICY CHOICES: WHY HAS ECONOMIC PERFORMANCE OF FSU STATES BEEN SO POOR? Paper prepared for the conference "Ten Years after the Collapse of the Soviet Union: Lessons and Perspectives", Princeton University , October 13-14, 2000. (http://www.wws.princeton.edu/~cis/POPOV.PDF)
Popov, V. Reform Strategies and Economic Performance of Russia's Regions. - World
Development, forthcoming. For a short Russian version see: Mirovaya Ekonomika i
Mezhdunarodniye Otnosheniya (MEiMO), No.9, 2000; NG-Politekonomiya, Sept. 12, 2000
(http://politeconomy.ng.ru/research/2000-09-12/7_reform.html).
EBRD Transition Report, 1999, Ch. 5, 6.
M. Castanheira, M., Popov, V. Framework Paper on the Political Economy of Growth in Transition Countries. EERC, 2000. See: http://www.gdnet.org/grproject/grprojectpapers.f1ml and http://www.eerc.ru/publications/newsl99-2/Popov.htm
Political Economy of Growth in Russia by V. Popov. PONARS Working Paper Series, No. 17. Davis Center for Russian Studies. Harvard University, 2000 (http://www.fas.harvard.edu/~ponars/POLICY%20MEMOS/Popov129.html).
Roland, Gerard. Transition and Economics: Politics, Markets, and Firms. MIT Press. Cambridge, MA, London, 2000, ch. 1,2,3,13.

Examples of questions and problems at the exam
Two questions and one problem would be offered at mid-term and final exams. Each question is worth 40 points, a problem is worth 20 points.

QUESTIONS

1. Define shock therapy and gradual transition. What are the principal components of these strategies?
2. Compare the most important features of the major models of transition (Chinese, Polish, Russian).
3. Describe reforms that should be carried out in order to transform a centrally planned economy into a market economy.
4. What is transformational recession? Why it occurs?
5. Why was there no transformational recession in China and Vietnam?
6. Why was the transformational recession in FSU countries deeper than in EE countries?
7. Why the transition to the market in the early 1920s (during NEP period) was not associated with the decline in output, whereas in the 1990s Russian economy went through a depression.
8. What is "growing out of socialism"? Explain costs and benefits of such a strategy.
9. Classify economic systems using as a criteria the magnitude and types of government economic intervention.
10. Explain the difference between macroeconomic stabilisation policy and industrial policy.
11. Classify market and non-market economic systems by types of property.
12. What is market socialism?
13. Discuss how the performance of coops and labour-managed firms differs from the performance of private companies in a market economy.
14. Contrast administrative and indicative planning.
15. What is a CPE and Soviet-type economic system? What types of CPE's exist?
16. Describe the economic system in Russian agriculture after the Emancipation Act of 1861.
17. Discuss the most important economic reasons for the Russian revolutions of 1905-07, February 1917 and October 1917.
18. Describe War Communism. Was this type of economic system inevitable during the war?
19. Describe briefly the major features of NEP.
20. Describe the Scissors Crisis of 1923. Why did it occur?
21. How the trends in Russian (Soviet) economic growth differ according to Soviet official statistics and alternative estimates?
22. Why did Soviet official statistics underestimate the rate of price increases and overestimate the growth of output?
23. What are hedonic price indices? When they differ most from ordinary price indices?
24. What are the more reliable and the less reliable Soviet official statistical data. Explain.
25. What is index number relativity (Gerschenkron effect)?
26. What were the major views expressed in the Industrialisation Debate?
27. Discuss the transition to the command economy in the late 1920s-early 1930s.
28. What were the cost and benefits of the transition to a command economy?
29. Discuss the arguments of scholars justifying the transition to the command economy.
30. Compare the War Communism economy of 1918-20 and the command economy that emerged after collectivisation.
31. Why does central planning create disproportions?
32. What were the major structural inefficiencies of Soviet economy? What economic losses did they entail?
33. Discuss concentration and specialisation in Soviet economy.
34. Discuss energy intensity, material intensity and inventories in Soviet economy.
35. Why capital productivity was low and falling in the CPEs?
36. What is monetary overhang? How it could be measured?
37. What were the major options to deal with the monetary overhang in the late 1980s in the USSR?
38. What is exchange rate based stabilisation and money based stabilisation? Discuss advantages and disadvantages of both.
39. Why did efforts to bring down inflation fail in Russia in 1992-95?
40. Describe and explain the dynamics of non-payments and barter transactions in Russian economy in the 1990s.
41. Discuss cost-push and demand-pull factors in Russian inflation in the 1990s.
42. Why inflation was brought under control in the 1920s, whereas in the 1990s several attempts to ensure macroeconomic stabilisation failed?
43. Discuss different types of currency crises.
44. Discuss the statement: "Russian currency crisis was caused by the outflow of capital due to the Asian contagion".
45. Discuss the statement: "Russian currency crisis was caused by the expansionary financial policy - unsustainable government budget deficit".
46. Discuss the statement: "Russian currency crises was caused by corruption and misuse of foreign credits and by the prodigality of the oligarchs".
47. Why actual (market) exchange rates in developing and transition economies is usually below PPP exchange rate?
48. What is capital flight? How the government should deal with the capital flight? Why?
49. What are "twin liberalisations"? Should this policy be followed or not? Why?
50. What is Dutch disease? Did Russian economy ever have it? Explain.
51. Why output after devaluations of 1997 in East Asian countries fell, whereas output in Russia and other CIS states after 1998 devaluation started to increase?
52. Discuss Russian currency crisis in the framework of Mundell-Fleming model (draw charts, if necessary).
53. Why China managed to avoid the currency crisis?
54. Discuss changes in the structure of GDP and industrial output in Russia. Why did they occur?
55. What is import substitution policy and export oriented growth? Explain.
56. Discuss distortions in interrepublican trade in the FSU. What were the consequences of these distortions.
57. How did Russian domestic resource prices compare to the prices of the world market in the 1990s? Why did they differ from the world prices and what were the consequences?
58. Discuss the statement: "Marketization of the Russian economy, deregulation of foreign trade and introduction of the convertibility of the rouble resulted in the de-industrialisation of Russia. It undermined R&D and led to the technological degradation".
59. Discuss the statement: "In line with the theory of comparative advantages Russia should export mostly raw materials".
60. What are different models of privatisation? What transition economies followed particular models?
61. What are the advantages and disadvantages of different ways of privatising state enterprises? Explain.
62. What is Tobin's q? How did this ratio in transition economies compare to that in Western countries? Explain.
63. What are the major features of the institution-based and market-based financial system? In what countries particular system predominates? Why?
64. Discuss differences in the structure of assets and liabilities of Russian and Western banks.
65. Discuss advantages and disadvantages of Anglo-American and German-Japanese financial system with respect to transition economies.
66. Why growth accounting when applied to transition economies in the 1990s produces strange results?
67. Discuss how state institutions influence performance in transition economies.
68. Discuss "advantages of backwardness" in transition economies.
69. Discuss how the speed of liberalisation affected performance of transition economies in the 1990s.
70. Why economically rational reforms are sometimes not carried out in democracies?
71. Why the reduction of output and incomes did not lead to the reversal of reforms in transition economies?
72. Discuss macroeconomics of populism. Under what conditions governments resort to populist policies?

PROBLEMS

1. In 1997 Russia had a current account surplus of $4 bill. Russia was also a net exporter of capital: the outflow of capital was $2 bill. greater than the inflow.
(a) Did the foreign exchange reserves increase or decrease? By how much?
(b) If the government budget deficit in 1997 was equal to $30 bill. and domestic business and personal savings totalled $50 bill., what was the amount of privately financed investment?
2. If money supply increased by 40%, while output fell by 30% and money velocity did not change, what was the increase in prices?

3. In 1998 Russian GDP in current prices totalled 2700 billion roubles, whereas 1997 in current prices it was 2500 billion roubles. Prices (GDP deflator) grew in 1998 as compared to 1997 by 14%. How did the physical volume of GDP (in constant prices) changed in 1998 as compared to 1997?
4. In 1928 the USSR was producing 100 "units" of textiles and 50 units of machinery and that is all. The 1928 per unit prices of textiles and machinery were 1R and 2R respectively. In 1980 the USSR produced 200 "units" of textiles and 1000 "units" of machinery, whereas prices for textiles and machinery have risen to 10R and 10R respectively. By how much did output increase in 1928-80 in 1928 prices? In 1980 prices? Explain the difference. By how much did prices increase in 1928-80?
5. In 1985 GDP per capita in the USSR was 30% of the U.S. level. Investment and defence expenditure accounted for 50% of the Soviet GDP, but only for 25% of the American GDP. What was the per capita non-defence consumption (public and private) in the USSR as compared to the U.S.?
6. In the base period personal disposable income was equal to 200 bill R, personal consumer expenditure - to 100 bill. R. Financial assets of the public (including cash) amounted to 400 bill R at the end of the base period, whereas monetary overhang (forced savings) was estimated at 200 bill. R. By how much prices would increase after they are deregulated in the current period, provided that there is no change neither in the personal disposable income, nor in consumer goods output, and that the public is willing to keep constant the real value of its consumer spending and financial assets?
7. The exchange rate of the rouble on July 1, 1998 was 6 R/$, the interest rate on dollar deposits was 10% a year, the interest rate on rouble deposits was 150% a year. What was the forward exchange rate expected by market participants for July 1, 1999?

 

Courses 2001/02

Courses offered
in 2000/01:

Advanced Topics in Econometrics

Applied Econometrics

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