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ECN 370 Week 5

by: Andrew Bashor

ECN 370 Week 5 POL/ECN/HIS 370

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Andrew Bashor


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About this Document

one day shorter notes because of geography quiz
Economy of Eastern Europe
Dr. Pellillo
Class Notes
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This 8 page Class Notes was uploaded by Andrew Bashor on Sunday February 28, 2016. The Class Notes belongs to POL/ECN/HIS 370 at a university taught by Dr. Pellillo in Spring 2016. Since its upload, it has received 19 views.

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Date Created: 02/28/16
Reform 02/16/2016 ▯ Crime in USSR  Conviction not highly publicized o Accuracy is low o Numbers not highly publicized  Theft o from state or persons was high o shortages led to high theft  Abuse of position high during 80’s o People losing faith in system o Enterprise directors beginning to take on government  Speculation o Partaking in black market o Rose throughout the 80’s o Result of shortage economy  Don’t normally see high speculation in capitalism ▯ ▯ Kornai’s model of Socialist and Capitalist Systems*  Model of the Socialist System o 1. Undivided power of Marxist-Leninist party -> o 2. Dominant position of state and quasi-state ownership -> o 3. Preponderance of bureaucratic coordination -> o 4. Soft budget constraint, weak responsiveness to prices, plan bargaining, quantity drive -> o 5. Chronic shortage economy, sellers’ market, labor shortage, unemployment on the job ->  Model of the Capitalist System o 1. Political power friendly to private property and market -> o 2. Dominant position of private property -> o 3. Preponderance of market coordination -> o 4. Hard budget constraint, strong responsiveness to prices -> o 5. No Chronic shortage, buyers’ market, chronic unemployment, fluctuation in the business cycle ▯ *available on canvas ▯ ▯ Socialism w/out Central Planning in Yugoslavia  Economic growth over time o Yugoslavia experienced decent, consistent growth o Other satellite nations experienced poor or negative growth  Countries o Bosnia and Herzegovina o Croatioa o Kosovo o Macedonia o Slovenia o Montenegro o Serbia ▯ State Socialism  More decentralized structure  Limited emphasis on central R&D, directed innovation  Form of market socialism  Greater international trade and labor mobility  Greater emphasis on market relations  Further reforms aimed at ecentralization in mid-70’s. o Basic organizations of associated labor  80,000 in early 80’s  negotiated exchange agreements between each other  like members of umbrella labor union, could coordinate with other members of enterprise  No functioning capital market ▯ Self Management in Yugoslavia  Centralized state property became “nonstate” social property o Owned by workers o Gives them incentive to manage  Enterprises owned by workers/self-managed  Aim to maximizing income per worker o Lower level of employment in traditional firm o Due to responsiveness of needs of buyers  Still faced soft budget constraints o Led to rent seeking at enterprise level o Sought preferential treatment from government o Enterprise failures rarely penalized  Strange fact – each republic in Yugoslavia attempted to develop motor vehicle industry ▯ Reform Directions  Two different directions for reforms o Greater centralization and ’taut’ central planning o More decentralization and reliance on markets for some economic activities (agriculture)  The New Economic Mechanism in Hungary in ‘68  Reforms undertaken in early/mid 60’s in E. Europe o Greater emphasis on profitability and prices reflecting supply/demand o State ownership of means of production  Hungary and Poland: growing imbalances  Price liberalization in the 80’s in Hungary o Decentralized of enterprise decision making o Bankruptcy law (86) o Two-tier banking (87) o FDI allowed (88) o Privatization under way ▯ NEM in Hungary  Replacing plan directives by market relations among firms  Limit scope of central price determination  Linking domestic prices of exports and imports to wrld market prices  Decentralizing a major part of investment decisions ▯ Prague Spring  Late 1960’s in Czechoslovakia: political and economic reform (partial decentralization) o Undertaken by Alexander Dubcek – first secretary of communist party of Czech.  Soviet/Warsaw Pact invasion in ‘68 o Suppressed by Soviet Union quickly o Dubcek forced to leave nation and communist party  Czechoslovakia maintained central system after 1968 o Stagnant yet fairly stable o Deficits, shortages, imbalance, inflation mostly avoided due to state intervention ▯ Perestroika (Restructuring)  Gorbachev – General Secretary (1985 – 1991)  Shmelev – critic who basically damned the old system  Anti-Alcohol Campaign o Started by Politburo and Central Committee – May 1985 o Measures to increase effective price of drinking and subsidize substitutes o Major alcohol – Vodka and Wine o Campaign  1. Reduced state production of alcohol  2. Restricted alcohol sales (where and when)  3. Centrally planned alcohol prices were increased  4. Sanctions for alcohol-related offenses  5. Subsidized substitute activities (parks, sports, cultural activities)  6. Media propaganda, advertising restrictions, health edu program, national temperance society  7. Treatment of alcoholism o Sales fell by as much as 2/3 o Fell by 50% alone between ’84-‘85 o Black/gray market production o Unpopular and lost revenue; ended in 1988  Felt residual impact  Soviet Joint Venture Law (’87) o Eventually allowed majority foreign ownership/control of enterprises  Legalized cooperatives in 1988 o Workers controlled assets o Especially prevalent in agriculture, but also banking o Allowed for more private ownership  Reform ideas became bolder and more radical over time o Plans for transition to market economy o Recommended that sell state enterprises internationally  Internal persons ended up capturing them…  Sold assets  Issues o Limited price liberalization  Total price lib. Would lead to hyperinflation  Not politically/economically feasible o Macroeconomic disequilibrium o Growing deficits arising from subsidies and falling revenues ▯ Transition - 1989  Move to mixed economy o Countries move to own planning within borders o Relative to USSR, nations doing own thing  Regimes falling to democrats o Many riots and also peaceful transition o Trasition lead by poets, artists, democrats o Fall of Berlin Wall  Yugoslavia o Slovenia seceded o Started chain reaction  Lithuania o Parliament moved toward sovereignty o Wasn’t immediately accepted by Russia  Georgia o Uprisings crushed by Soviet Union o Lead to strong nationalist movement o Massive protests and crushing still memorialized  Other notable issues o Most constituent countries moving toward independence o USSR still operated and existed, did not keep nations o Nations took over own enterprises ▯ 1991 – final fall  Gorbachev almost overthrown in Crimea o Hardline communists tried to overthrow Gorbachev in August o Coup failed miserably o Set up additional pressures politically  Disintegration of State speeds up o Final nations move to independent economic movements o Gorbachev resigns in December 1991 o Gorbachev gives speech and resigns ▯ What Now?  How to transition is still debated o What would you do first? o What economic reform/policy recommendations would you make to the gov.? o What advice would you give to entrepreneurs and enterprise managers? ▯


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