APPLIED ECONOMICS OF TRANSITIONS
Christof Ruhl
Winter - Spring, 1994
Department of Economics
CENTRAL EUROPEAN UNIVERSITY



Course Outline:

One of the most fascinating aspects of economics is the interdependence between ideas and events. As economic theory develops and becomes applied, it shapes real world events; and real events pose new problems and challenges and thus determine theoretical developments. This mutual influence is sometimes hidden, sometimes obvious, but it is always present. It is most clearly visible in extreme situations, where challenges to received wisdom are so severe that existing doctrines are debated, and sometimes revised, immediately and in public. The transition from central planning to market coordinated economic systems represents such as case.

Thus, while a course on "the applied economics of transition" could be organized in many ways (concentrating on economic policy, pursuing case studies, being pre-occupied solely with data or tracing particular aspects from a theoretical viewpoint only), they all, and if only implicitly, would reflect this tension. This course will try to explicitly focus on the application of economic concepts to problems of the transition, and will try to work out the feedbacks to economic theory, should there be any. Generally, this involves tracing the economic concepts underlying particular policy proposals, to see how they have been implemented, and to ask whether anything can be learned from that experience.

We start by discussing the general macroeconomic blueprints developed to sequence the transition, and the economic situation in which they were applied. The course then goes deeper into compartments of economic theory which also denote important "subfields" of the transition: Monetary theory and the sources of inflation; privatization and the inherited industrial structure, blocking restructuring; the need to impose hard budged constraints and effective corporate governance and the principal agent problems it raises; institutional change and the emergence of new economic alliances; and economic policy options and the difficulties of imposed institutional change.

This more analytical part will cover about two thirds of the course; the fate of individual countries and circumstances will serve here mostly to illustrate more general principles. But to study more closely how these principles work out in practice, we will concentrate on three "case studies" and the somewhat extreme scenarios they provide.

The first will be East Germany, perhaps the most privileged of all the countries in question. Germany's unique position proves helpful in investigating the role of monetary reform, institutional change, and of active economic policy; it may also provide an example of the impact a successful economic transformation of Central European countries can have on existing international economic arrangements.

The second example, Russia after the disintegration of the CIS, is somewhat on the opposite extreme. It denotes the pitfalls of economic reform. The inherited industrial structure and interindustry arrears, stabilization and the limits of monetary policy and finally, the importance of credibility and time consistency for economic reform will be some of the topics addressed. The last example is only at first sight a bit outside the scope of this course, but will bring us back to were we started from: China and the road to reform it took. The "Chinese experience" attracts increasing attention, and these discussions are connected to a topic familiar from the beginning of the course: the sequencing of economic reforms. As things seem to unfold in Russia and other countries, it might turn out very useful to have a second glance at this problem.

Required Readings:

Below, you find a list of readings and the dates at which they will be covered in class. I have tried to limit the readings as far as possible. In addition, some of the longer articles will be cut down to a couple of "core pages which are indispensable, and sometimes a choice between articles will be possible. Please note that the material is required in the very sense that you should be familiar with it before lectures take place. It represents background material, i.e. in most cases I will assume familiarity and will not cover the readings extensively in class again.

Grading:

The course grade is made up of three components: Midterm (30% of total course grade), final exam (40%), and, all together, four papers and quizzes (308). Procedures for the midterm (March 3) and the final (March 18) are standard. I will pass out a problem set in week 4 to help you prepare for the final, and have set aside the last lecture (March 17) to go through this problem set assignment.

In addition to midterm and final, you are required to take two quizzes (worth 7% of the final course grade each) and to write two short papers (worth 8% each). The quizzes will be held in class. You'll have to pick one out of three possible questions and have about 25 minutes to answer it. All questions will refer to the readings covered in the week preceding the quiz. Similar for the paper assignments: you'll pick one out of three topics, which refer to material covered in class, and answer it at home. Papers have to be typed and should not be longer than two pages. The purpose of these exercises is twofold: To ensure that everyone keeps up with the reading, and to prepare for the later task of writing research papers. Consequently, you should take care that the short papers are well organized and accessible to the reader (which is why they are valued a little higher than the quizzes). Shannon Schraub (Room 421) will be available to read through your papers, and it is a very good idea to have someone else proof-read it to check the consistency of the argument and also the English, before turning in a paper.

Office Hours:

Every Wednesday, 2:00 to 4:00 in Room 416. Please try to arrange additional appointments with me in person or by calling 279351, Extension 1415. You are welcome to just drop by, but without prescheduled appointment you'll face the risk of me telling you that I have no time at this particular moment.

Tentative Schedule

Week 1: Macroeconomic Blueprints for the Transition

* Feb. 15: Course Outline: From Central Planning to Market Coordination; Demand versus Supply Constraint Economies.

** Feb. 17: Macroeconomic Concepts - a Refresher: Saving, Investment and Capital Markets; Aggregate Demand and Supply; the Trade-off between Employment and Inflation; Monetary and Fiscal Policies; Classical and Keynesian Viewpoints.

*** Feb. 18: Reform Blueprints and their Fate: the Lipton/ Sachs Proposal; J-curve and inverted Phillips Curve; the three "-zations"; "Gradualism" versus "Big Bang": the Shatalin-Plan.

Quiz # 1

* No readings

** For those who need a second look: J. Sachs, F. Larrain (1993), Macroeconomics in the Global Economy, Ch. 2, 3, 12, 15 covers all that is needed.
J. Kornai (1993), Transformational Recession, Discussion Papers No.1, Collegium Budapest, Institute for Advanced Study.

*** D. Lipton and J. Sachs (1990), Creating a Market Economy in Eastern Europe: The Case of Poland, Brookings Papers on Economic Activity, 1, pp. 75-147. Read pp. 99-103.
S. Fischer and A. Gelb (1991), The Process of Socialist Economic Transformation, Journal of Economic Perspective, 5, pp. 91-105.

Week 2: The Legacy of Central Planning: Roadblock to Reform?

* Feb. 22: The Industrial Structure and the Imposition of Hard Budged Constraints: Joint Ownership and the Division of Labor; Competition and Technological Change; Increasing Returns to Scale; Extent of the Market and Firm Size.

** Feb. 24: Property Rights and Institutional Change: An Economic Theory of Institutional Change; Property Rights and Legal Codes; Credibility and the Enforceability of Contracts.

*** Feb. 25: Inflation and the Monetary Regime: Causes and Consequences of Inflation; Limits to Central Banking;-the Choice of the Monetary Standard; Currency Boards; Monetary Reform.

First Paper Due

* A. Leijonhufvud (1985), Capitalism and the Factory System, Longlois (ed.), Economics as a Process, pp. 203-223.

A. Leijonhufvud (1993), The Nature of the Depression in the Former Soviet Union, New Left Review, Vol. 199 (May-June), pp. 120-126.

** J. Lin (1989), An Economic Theory of Institutional Change: Induced and Imposed Change, The Cato Journal, Vol. 9, pp. 133.

A. Alchian (1988), Entry on "Property Rights", Eatwell, Milgate, Newman (eds.), The New Palgrave.

M. Olson (1992), Preface (pp. vii-x) to Clague, Rausser (eds.) The Emergence of Market Economies in Eastern Europe, pp. 55-75.

*** V. Hofmann and F.L. Sell (1993), Credibility, Currency Convertibility and the Stabilization of the Rouble, InterEconomics, 28, pp. 11-16.

G. Spencer and A. Cheasty (1993), The Ruble Area: A Breaking of - Old Ties?, Finance and Development, June, pp. 2-5.

Week 3: Privatization and Corporate Governance

* March 1: Methods of Privatization: Asset Transfer and New Enterprises; Corporatization and Hard Budged Constraints; Voucher Schemes; Unbundeling and Restructuring before and after Privatization; Insider versus Outsider Privatization, Part I.

** March 3: MIDTERM

*** March 4: Privatization and Corporate Governance: Joint Ownership and the Principal Agent Problem; the Role of Wealth in Corporate Control; Insider and Outsider Privatization, Part II.

* B. Djelic and N. Tsukanova (1993), Voucher Auctions: A Crucial Step toward Privatization, RFE/RL Research Report (June), pp. 10-18.

P. Aghion, O. Blanchard, R. Burgess (1993), The Behavior of State Firms in Eastern Europe: Pre-Privatization, European Bank for Reconstruction and Development, Working Paper #12.

R. Frydman, A. Rapaczynski (1993), Privatization in Eastern Europe: Is the State Withering Away?, Finance and Development (June), pp. 10-13.

** No readings

*** H. Demsetz (1993), Putting Wealth and Enterprise Control in the Production Function, forthcoming in Demsetz (ed.), Critical Commentaries on Development the Firm and Industrial Organization.

C. Ruhl (1993), Privatization and Corporate Control, mss., UCLA.

Week 4: Policy Options and Case Studies

* March 8: Policy Options: A Case for Industrial Policy? Monetary Policy and Stabilization; Privatization and Restructuring; the Role of International Organizations.

Paper #2 Due

** March 10: East Germany: Wage versus Investment Subsidies; the "Productivity Gap"; Monetary Reform; Privatization and Restitution; Institutional Change and Legal Reform; the Impact on Western Markets.

*** March 11: Russia: Inter-Industry Arrears and Inflation; Corporate Control and the Emergence of New Alliances; the Problem of International Assistance; A Case for "Gradualism"?

Quiz #2

* S. Fischer (1993), Socialist Economy Reform: Lessons of the First Three Years, The American Economic Review, Papers and Proceedings, May, pp. 390-395.

M.L. Weitzman (1993), Economic Transition: Can Theory Help?, European Economic Review, 37, pp. 549-555.

D. Lipton (1993), Reform Endangered, Foreign Policy (Spring), pp. 57-78.

** H.W. Sinn (l990), Macroeconomic Aspects of German Unification, Center for Economic Policy Research (Stanford), No. 224, pp. 1-13.

G. Akerlof et al. (1991), East Germany in from the Cold, Brookings Papers on Economic Activities, pp. 70-87.

G. Sinn, H.-W. Sinn (1992), New Money, Ch. 3 of Jumpstart, pp. 52-79.

*** M. Ellman (1992), Shock Therapy in Russia: Failure or Partial Success?, RFE/RL Research Report, August, pp. 48-61.

B. Ickes and R. Ryterman (1993), Roadblock to Economic Reform: Inter-Enterprise Debt and the Transition to Markets, mss, pp. 1-23.

M. Boycko, A. Shleifer, R. Vishny (1993), Privatizing Russia, mss. Brooking Panel on Economic Activity

Week 5:

* March 15: The Chinese Example: Reform as a Controlled Experiment; the State Sector Taxation and Removal of Subsidies; Integrating the Dual Economy.

** March 17: Summing up and Preparation

*** March 18: FINAL EXAM

* J. Sachs, W. Woo (1993), Structural Factors in the Economic Reforms of China, Eastern Europe and the Former Soviet Union, mss., Economic Policy Forum.

M. Goldman (1993), The Chinese Model: The Solution to Russia's Economic Ills?, Current History, Vol. 92, pp. 320-323.

G. Xiao (1991), What Is Special about China's Economic Reforms? The World Bank, Research Paper 23.

** No readings

*** No readings



CRC-Curriculum Resource Center
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Modified: May, 1996

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