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Central planning. --- Central planning

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Central planning

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Central planning

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This paper identifies obstacles hindering the transformation of centrally-planned economies (CPEs) into well-functioning market economies. The analysis is motivated by the recent experience with economic transformation and restructuring in Eastern Europe and the U.S.S.R. The economic system in CPEs is highly distorted. Prices do not represent real social costs, incentives systems are absent, losses of unprofitable state-owned enterprises are automatically financed, legislations vital for the functioning of markets are not in place, private ownership and property rights are underdeveloped, bankruptcy laws are absent, markets are missing, shortages prevail and, occasionally, inflation is high. The obstacles identified relate to (i) anticipatory dynamics, (ii) monetary overhang and the budget, and (iii) underdeveloped credit markets. It is demonstrated that these obstacles inhibit the effectiveness of price reform, monetary and credit policies, and trade liberalization. The analysis focuses on various ways to remove the obstacles. In this regard, a special examination is made of the implications of cleaning the balance sheets of enterprises and banks from nonperforming loans, as well as ways to enhance credibility. In the absence of such measures, privatization will be difficult since the necessary information about creditworthiness of firms is lacking. The paper concludes with a brief discussion of sequencing, safety nets. and their associated obstacles.

Central planning.

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This paper deals with the early stages of transformation of centrally-planned economies (CBEs) into market economies during which expectations playa key role. It focuses on the transitional phase during which the economy is not any more a CPE but has not yet become a market economy. During this phase the economy is referred to as a 'previously centrally-planned economy" (PCPE). A simple model is developed to analyze the consequences of expected price liberalization. The model highlights the anticipatory character of economic behavior during the early stages of the transformation process. A major focus is given to credit markets. The CPEs undergoing transformation lack depth and breadth of financial markets. The lack of information necessary to assess risk and creditworthiness complicates the conduct of credit polity. The analysis illustrates the benefits of an early development of such markets, and of finding appropriate ways to "clean" the balance sheets of enterprises and banks from bad loans. It demonstrates the cost of a fine-tuning strategy and the benefits from a quick implementation of price reform. The paper also examines alternative means to reduce 'liquidity overhang, " and shows that all involve taxation of one form or another. The consequences of privatization are analyzed and the benefits of an early development of an effective tax system highlighted.

Central planning.