Introduction - UW Department of Economics



Econ 495 autumn 2012

Class: TTh 1:30-3:20. Smith 105

Judith Thornton

Office Hours: TTh 3:30-5:30 and by appointment, Office: Savery 332; Course Web Site:

Economics of the Transitional Economies

Introduction

What is a transitional economy? We use this term to characterize former socialist economies engaged in the process of establishing market institutions, but it may also distinguish any economy, which attempts to expand the roles of private ownership, investment, and entrepreneurship and to provide market-supporting governmental and legal institutions. Transitional economies are characterized by rapid and significant changes in institutional arrangements. Members of the society face changes in relative prices and in the structure of economic activity combined with high risk and uncertainty.

The Twentieth Century was an era in which, briefly, almost half of the world’s population was governed by Marxist states. These states transferred the ownership of land, resources, and physical capital stocks to the government and established centralized administrative mechanisms for managing production. Today, most of these Soviet-style economic systems are gone as major economic reform programs evolve in dozens of formerly command economies to put in place institutions underpinning what their policy-makers define as a “normal economy.” By “normal”, they mean a system in which independent individuals may enjoy private ownership of land, housing, and assets and are free to establish independent enterprises. Individuals may enter into voluntary, mutual exchange in markets at market-determined prices. They can invest in productive assets, innovate, and enter competitive markets, facing uncertain benefits and costs in a risky world.

After twenty years of experience, there is great variation in the institutions of public governance in these countries and in their economic performance. What can we learn from this mammoth social experiment? How did some transitional economies embark on a path of rising growth and welfare while others suffer stagnation and poverty? To understand the role of institutions in economic performance, we look at the incentive features of administrative and market institutions and the effects of economic arrangements, focusing on macroeconomic stabilization, market liberalization, property rights, enterprise governance, and the role of the state in providing public infrastructure and rule of law.

Course Goals:

1. Applied Goals

The goal of the course is to survey the historical experience of a sample of economies undergoing rapid institutional change. We apply microeconomic principles to an understanding of the choices and constraints policy-makers and citizens face and the performance outcomes they experience.

Explore how institutional choices of policy-makers impact economic growth, productivity, poverty, and welfare and how economic performance influences formation of institutions.

Understand how administrative decision-makers collect information and make decisions in non-market environments and how individuals and firms make choices subject to market constraints and incentives.

Understand how government policies affect the allocation of resources, productivity, and growth in a command economy and in a market economy.

Understand how prices and property rights in a market system inform the decisions about what to produce, how to produce it, and who gets it.

Develop skill in presenting economic concepts and the results of empirical analysis in writing to a broad audience.

2. Problem-Solving Goals

Apply microeconomic theory to an understanding of the role of institutions in a variety of administrative and market systems.

Understand how economic arrangements influence the behavior of decision-makers, focusing on incentives, constraints, and sources of uncertainty.

Understand how institutional constraints and incentives impact the economic environment faced by individuals.

Use game theory to explain the strategic choices of individuals when outcomes depend on the strategic actions of more than one player.

Use the theory of risk to understand how individuals respond to uncertain economic outcomes.

Understand how market structure and regulatory policies influences the allocation of resources.

Course Requirements

Class lectures and discussions follow the syllabus, below. Grades are based on 3 hour tests, an in-class presentation, and a final essay. Each exam counts 25% and the presentation-plus-essay counts 25%.

This course is organized to provide students with writing credit. Thus, each of the assignments is organized to challenge you to present empirical evidence and economic analysis in an essay format to an informed audience in addition to the usual demonstration of quantitative skills in economics. To develop skills in analytical writing, one-half of each of the first and second hour tests consists of an essay that will receive constructive criticism on its analysis and organization as well as on its rigor and substance. The individual essay topics posed in the hour tests are designed to provide building blocks for your final essay, due at the end of the quarter.

The final hour test and essay are cumulative. In the last third of the quarter, students will organize into groups of 4 to prepare a brief presentation on some aspect of the economic performance of a European or Eurasian transition economy. Each member of a group will write a brief (6-8 pages) essay on a topic of his/her choice relating to economic performance in that economy. Individual essays will support a group assessment of country performance and prospects or a comparison of performance across countries during a brief presentation to the class.

Text:

Aslund, Anders. How Capitalism Was Built. Cambridge University Press 2007.

Thornton notes: you will find discussions of economic issues for many of the individual chapters below. There are also introductions to the technical tools and practice problems by topic.

European Bank for Reconstruction and Development. Transition Report 2011; Crisis and Transition: the People’s Perspective. The annual Transition Reports provide a rich source of information on the relationship between institutional change and economic performance. The readings include selections from these reports: 2011, 2008, and 1999, and you are encouraged to follow a country in a selection of these reports.

Suggested data sources for up-to-date information:

EBRD Transition Report data







World Bank Countries

WNSITE/external/countries/ECAEXT/Estoniaextn/

Russian Economic Reports



Doing Business. World Bank.

World Bank: The Business Environment and Enterprise Performance Survey (BEEPS)



Permanent URL:

Optional Reference:

Perloff, Jeffrey Microeconomics (any edition). We assume the ability to apply microeconomic tools. Students who are unsure of their ability to use microeconomic tools should review the basics in any edition of Perloff. Some of the important microeconomic topics relating to transition include competitive firms and markets, market power and structure, productivity and growth, regulatory policies, externalities and public goods, uncertainty, and strategic behavior.

Other Optional References

EBRD. Transition Report, All years (1999-2011)

Gros, Daniel and Alfred Steinherr. Winds of Change (1995) London: Longman.

Gaidar, Yegor. Collapse of an Empire. (2007) Washington D.C.: Brookings

Kornai, Janos. The Socialist System. Princeton University Press

Shleifer, Andrei and Daniel Treisman. (2000) Without a Map: Political Tactics and Economic Reform in Russia

Thornton, Judith and Charles Ziegler (2002) The Russian Far East: Region at Risk. Seattle: University of Washington Press.

Aslund, Anders (2010) The Last Shall Be First; East European Financial Crisis

Alexeev, Michael and Shlomo Weber (2012) The Oxford Handbook of Russian Economic Development

Reading List

I Initial Conditions: Why Reform the Socialist Economy?

Aslund, Anders. How Capitalism Was Built. Cambridge University Press, 2007. Introduction.

Mau, Vladimir. 2011. “The Role of the State and Creation of a Market Economy in Russia.” Bank of Finland Discussion Paper 23. ().

Thornton, Judith, “Institutional Change,” “Property Rights and Incentives” (web site).

Medvedev, Dimitry, “Go Russia!”



Review Perloff, Jeffrey Microeconomics, Chapters 2 and 3 Supply and Demand (What are the incentives of suppliers and demanders in markets and in administrative systems?)

1. History and Institutions of the Russian Economy: Collectivization, State Ownership, Investment, Governance

Aslund, Anders. How Capitalism Was Built. Cambridge University Press, 2007. Chapter 1: Communism and Its Demise

Thornton, Judith, “Marx,” “Emancipation and Pre-Revolutionary Russia,” “Stalin’s Development Strategy” (web site)

2. Techniques of Centralized Decision-Making

Thornton, Judith, “Introduction to Input-Output,” “Linear Programming,” (web site); Practice problems in input-output and linear programming

3. The Planned Economy in Practice; Bureaucracy, Missing Markets, Corruption, Rationing, and the Informal Economy

Thornton, Judith, “Administrative Allocation and Rationing,” “Rationing Problem,” “Corruption and Unofficial Economy,” (web site)

Review Perloff, Microeconomics Chapter 11: Monopoly (How did industrial ministries maintain monopoly power?), Chapter 4: Consumer Choice (How do rationing constraints impact welfare and inequality?)

4. The Planned Economy in Practice: The Firm and Household; Economic Growth and Productivity

Thornton, Judith, “Restructuring Production without Market Infrastructure,” in Nelson, et. al., Transforming Post-Communist Political Economies, National Research Council, pp. 133-156 (web site) Also at

Thornton, Judith, “Collectivization of Agriculture,” “Growth,” “Harrod-Domar,” (web site.)

Review Perloff, Chapter 6.4 to 6.6: Long-run Production

Hour Test, October 16

II Reform Strategies

5. Transition in Theory; Liberalization

Thornton, Judith, “Chinese Reform in the 1980s,” “Monopoly.”

Aslund, Anders. How Capitalism Was Built. Chapter 2 Gradualism; 3 Output Slump and Recovery; Chapter 4: Liberalization;

Thornton, Judith. "Structural Change in the Russian Far East: Implications for Trade and Investment," Atlantic Economic Journal (September, 1996), pp. 208-227 (on web site.)

Review Perloff, Jeffrey Microeconomics, Ch 2 and 3 Demand and Supply and Ch 17: Uncertainty

Thornton, Judith, “Risk, Uncertainty, Decision-Analysis” (web site)

6. Privatization and Governance

Brown, David, John Earle, and Scott Gehlbach (2011) “Privatization,” working paper

Aslund, Anders. How Capitalism Was Built. Chapter 6: Privatization; Chapter 10: Role of the Oligarchs

Thornton, Judith, "The Strategies of Foreign and Foreign-Assisted Firms in the Russian Far East; Alternatives to Missing Infrastructure," (with Nadezhda N. Mikheeva) Comparative Economic Studies. Vol 38, No. 4, (December 1996) 85-119 (on the course web site.)

Review Perloff, Microeconomics, Chapter 9: Applying the Competitive Model; Chapter 20: Contracts and Moral Hazards

7. Hyperinflation and Macroeconomic Stabilization

Aslund, Anders. How Capitalism Was Built. Chapter 5: Hyperinflation to Financial Stability

Perotti, Enrico, Banking Crises Under Soft Legal Constraints: Lessons from the Russian Meltdown, University of Amsterdam Working Paper March 2001 (web site).

Review Perloff, Jeffrey Microeconomics, Chapter 16 Interest Rates and Capital Markets

III Evaluating the Lessons of Transition

8. Growth and Social Welfare

Aslund, Anders How Capitalism Was Built. Chapter 7 Social System

EBRD. Transition Report: Recovery and Reform 2010. Ch 2 Crisis; Ch 5 Business Environment

Brainerd, Elizabeth (2010) “Human Development in Eastern Europe and the CIS” UNDP Research Paper 2010/16 (web site).

Thornton, Judith, “Institutional Change and Economic Development in Siberia and the Russian Far East” UW Economics working paper 2011.

9. State Capacity and Welfare

Aslund, Anders. How Capitalism Was Built. Chapter 8: Democracy versus Authoritarianism; Chapter 9: From Crime to Law;

Aslund, Anders. Russia after the Global Economic Crisis, Ch 3: Zhuravskaya, “Federalism in Russia” and Ch 4 Frye, “Corruption and Rule of Law.”

Hour Test, November 8

10. Innovation, Efficiency and Modernization

Bloom, Nicholas, Helena Shweiger, John Van Reenen (2010) “The Land that Lean Manufacturing Forgot. Management Practices in Transition Countries NBER Working Paper 17231 (on-line through UW library)

Eicher, Theo and Till Schreiber, “Structural Policies and Growth: Time Series Evidence from a Natural Experiment” Journal of Development Economics, 91 (2010) 169–17

.

11. Integration into the World Economy

Aslund, Anders. How Capitalism Was Built. Chapter 11: Impact of the Outside World.

Thornton, Judith. The Impact of Nationalization and Insecure Property Rights on Oil and Gas Developments in Russia’s Asia Pacific. Waseda University, GIARI Occasional Paper (November 2009)

12. Financial Crisis, Investment, and Prospects

Aslund, Anders (2010) The Last Shall Be First, Chapter 8 Eastern Europe and the Fiscal Crisis in the Eurozone;

Aslund, Anders (2010) “Latvia’s Lessons for the World,” (web site).

EBRD Transition Report: Crisis and Transition: the People’s Perspective. Ch 2 Crisis and the Household; Ch 4 Entrepreneurship



Group Presentations: November 27, November 29, December 4 Use Transition Report and World Bank data for your individual country studies.

Final Essay Due, December 4, (6 to 8 pages)

Hour Exam, December 6

|Schedule and Readings |

|Tuesday |Thursday |

|25-Sep |27-Sep |

|Institutional Change and Property Rights |1. History and Institutions of Russia |

|Aslund Intro |Marxian Economics, Stalin's Development Model |

|2-Oct |4-Oct |

|2. Planning techniques Input-Output |2. Linear Programming,Socialist Firm |

|Thornton notes: input-output |Thornton notes: linear programming |

|9-Oct |11-Oct |

|3. Planned Economy in Practice |4. Planned Economy in Practice |

| Corruption, Rationing, Informal Economy |The Firm and Household; Economic Growth |

|Aslund, Ch 1 | |

|16-Oct |18-Oct |

|Hour Test |5. Transition in Theory; Liberalization |

| |Aslund Ch 2, 3, 4 |

|23-Oct |25-Oct |

|6. Privatization and Governance |7. Hyperinflation, Macroeconomic Stabilization |

|Aslund Ch 6, Ch 10 |Aslund Ch 5, Perotti |

|30-Oct |1-Nov |

|8. Growth and Welfare |8. Growth and Welfare |

|Aslund Ch 7, Brainerd |EBRD Slow and Rapid Reform |

|6-Nov |8-Nov |

|9. State Capacity and Welfare |Hour Test |

|Aslund Ch 8 | |

|8-Nov |10-Nov |

|10. Innovation, Structural Change and Modernization |10. Innovation, Structural Change |

|Aslund Ch 9, Bloom |EBRD Slow and Fast Reformer |

|13-Nov |15-Nov |

|11. Integration into world economy |12 Financial crisis, investment |

|Trade and investment |Aslund Eastern Europe |

|20-Nov |22-Nov |

|Lessons from Transition |Thanksgiving |

|Eicher-Schreiber |  |

|27-Nov |29-Nov |

|Group presentations |Group presentations |

|  |  |

|4-Dec |6-Dec |

|Group presentations |Hour Test |

|Final Essay Due |  |

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