EC1111 - International Economic Policy Vinay P. Nundlall Seminar 8 suggested answers Question 1 Background: A market economy is one where there is little intervention by the government, and where prices are allowed to fluctuate according to market forces of demand and supply. The quantity produced by suppliers depends upon demand by consumers. In a planned economy, the executive body or dictator decides how much should be produced for consumers. Enterprises are told what and how much to produce, who to procure raw materials from and who to sell. Often, the planner will not care about costs: a hard budget constraint is inexistent. Transition is the process during which an economy that was previously operating under a command/planned economy changes to a market economy. It involves price liberalization, privatization of state owned enterprises, reforms of institutions and the legal system, and stabilization of the economy. From the article "The Other China", summarise the cost and benefits of the transition from a centrally planned economy to a market economy in China. Discuss and debate around the following topics: Who are the winners and the losers from transition? Is transition good or bad? The same traits that have been seen in Russia re-appear: Corruption Inefficiency Big SOE's closing down because of lack of funding, which then leads to unemployment, poverty and lack of social welfare (that used to be provided by the SOE's). In summary, Costs: . Dismantled state-owned enterprise (SOE): Medical bills and heating bills are not paid by them => increased poverty as wages dropped · Massive layoffs before closure of some SOE: Unemployment increased also private firms are not enough competitive to increase productivity and employ many workers
. Increased unemployment accompanied with lack of social protection=> increased poverty · High cost of firing workers => Foreign investors are not willing to invest · Existence of corruption and trying to tackle it by legislations Benefits · More competitive firms can increase productivity · Productive firms can increase employment . Price liberalisation and its benefits Is Transition good or bad? In the long run, there is more economic growth, increase in income and more economic and sometimes individual freedom. Who are the winners and who are the losers from Transition? The winners are the insiders and the elite that are close to the executive. They may also be the entrepreneurs who had more access to bank loans and foreign markets. The losers in the short and medium term have been the poor who have become poorer. Further, those who were employed by the SOE and who lost their jobs also became poorer. The poor could not rely on subsidies and safety nets provided by the government and the SOEs. Question 2 Discuss how transition can become a success. Refer to the case studies of Estonia from the paper on the topic in Moodle (Economic Transition in Estonia) and the course Reader Chapter on Estonia. In the early days following Transition, it seems that initial conditions in the country/economy are very