Silviase/jgov_v1.4_full_ann huggingface dataset:
# Part 1 Theoretical and Empirical Issues of Transitional Economies

## Chapter I Conceptual and Theoretical Framework

## 1 Introduction

## 1 -1 Conceptual Framework

Our subject is “transition to a market economy”, or a movement from a centrally planned to a market-based economic system. This is often called “economic reform”. As the concept of economic reform is much broader than the transition to a market economy, and accordingly, include concepts which are quite different from the latter, it seems useful to confirm the definition of these concepts at the very beginning.

## 1 -1-1 Economic Reform

In our opinion, the broad concept of economic reform is composed of the following four components:

## (1) Reforms of the Economic Systems of Developed Countries

This is the attempt at revitalization of developed economies through the enhancement of market mechanisms, such as deregulation, liberalization, decentralization, and privatization. The recent movement of economic or structural reform was initiated by the adoption of the “positive adjustment policy” by OECD, in 1978. The purpose was to overcome the macroeconomic stagnation caused by the oil crises. The movement was accelerated by the Thatcher administration in the U.K. and Reagan administration in U.S., during the 1980s.

## (2) Structural Adjustment in Developing Countries

The enhancement of market mechanisms has also been attempted in developing countries since the late 1970s. The rationale is that the removal or reduction of excessive regulation and government intervention is crucial in overcoming macroeconomic disequilibria and leading to sustained growth. In the late 1970s and early 1980s, many developing countries suffered from high inflation, unsustainable current account deficits, high fiscal deficits, and stagnant growth. As is well known, the endeavor of structural adjustment has been urged and strongly supported by the World Bank through structural adjustment lending (SAL) and the IMF through structural adjustment facility (SAF).

## (3) Economic Reform within the Framework of Centrally Planned System

There were various reform attempts of centrally planned economic systems. They were “campaigns” for efficiency improvement or production increases under the existing system. Particularly, in the late 1960s, there were strong reform movements called “market socialism” in Eastern Europe (East Germany, Czechoslovakia, Hungary, Poland, Yugoslavia etc.) and the former USSR; typical examples are the “new economic mechanism” in Hungary. Despite a wide variety of features, some common aspects are observed among these reform attempts. First, the central purpose was to overcome chronic inefficiency through the introduction of profit incentives and delegation of power to factory managers. Second, the basic idea was to combine plan with market, with the dominance of the former (the idea of “regulated market mechanism” or “guided market model”). Third, economic reform was indirectly related to political reform, for example through labor participation in management. $ ^{1} $
and the allocation of resources”. $ ^{5} $ It took more than a decade for the Chinese government to advocate the movement to a market economy.

It is agreed that the reforms in the former USSR were initiated in 1986 in the form of perestroika (“restructuring”). $ ^{6} $ However, it is to be admitted that the reforms in the early days of perestroika were basically in the nature of traditional campaigns rather than the reforms of the economic system itself, although more emphasis was later placed on the reform of the system. $ ^{7} $ In early 1990s, the reform was accelerated; in January 1991, many prices were shifted from fixed to contractual. Further in January 1992, controls on most prices were officially lifted. $ ^{8} $ Following this drastic change, the G7 began giving financial assistance to Russia.

It is possible to call the early part of the reform a “piecemeal approach”, and the later part “comprehensive approach”, but the transition from the former to the latter is blurred. In our opinion, it is better to regard the former as an integrated part of the reform, although the original intention might be far from the transition to a market economy.

We would like to propose to treat the long series of reform attempts in Vietnam and Laos since the late 1970s as an integrated reform. Usually the reforms in Vietnam are considered to have been initiated in 1986, by “doi moi” (renovation). $ ^{9} $ However, it should be pointed out that in Vietnam, the “output contract system” was introduced in the agricultural sector in 1979-80, in order to motivate farmers, and, in the industrial sector as well liberalization measures of state enterprise management were introduced in 1981, under the name of “three plan system”. $ ^{10} $ The nature of the series is basically similar to the cases of China. A similar situation is also observed in Laos.

(Shimomura)
## FOOTNOTES

1/NAKAYAMA, [1980] SATO, [1980]

2/OHNO, [1993]

3/World Bank, [1992] BELL et al, [1993] KONDO and WADA eds., [1993] YABUKI, [1992]

4/World Bank, [1992a]

5/BELL et al, [1993]

6/EBRD, [1993] KONDO and WADA eds., [1993]

7/IMF, IBRD, OECD, EBRD, [1990]

8/KOHEN, PHILLIPS, [1993]

9/World Bank, [1993]

10/Socialist Republic of Vietnam, [1993]
## REFERENCES

BELL, Michael W., KHOR, Hoe Ee and KOCHHAR, Kalpana, CHINA AT THE THRESHOLD OF A MARKET ECONOMY, International Monetary Fund, 1993.

European Bank for Reconstruction and Development, ANNUAL ECONOMIC OUTLOOK, 1993.

International Monetary Fund, International Bank for Reconstruction and Development, Organization for Economic Co-operation and Development, European Bank for Reconstruction and Development, THE ECONOMY OF THE USSR, 1990.

KOHEN, Vincent and PHILLIPS, Steven, PRICE LIBERALIZATION IN RUSSIA, International Monetary Fund, 1993.

KONDO, Kuniyasu and WADA, Haruki eds., PERESTROIKA TO KAIKAKU - KAIHO (REFORMS IN POST - MAOIST CHINA AND PERESTROIKA : A COMPARISON), Tokyo Daigaku Shuppankai, 1993.

NAKAYAMA, Hiromasa, “Russia Soren no Keizai Hatten” (Economic Development of Russia and the USSR), KEIZAIGAKU DAIJITEN (ENCYCLOPEDIA OF ECONOMICS), Toyo Keizai Shimpo-Sha, 1980.

OHNO, Kenichi, “Shijo Keizai Donyu no Kihon Mondai” (Basic Issues of Market-Oriented Reforms), SHAKAI KAGAKU KENKYU, Vol. 45, No. 2, November, 1993.

SATO, Tsuneaki, “Shakai - Shugi” (Socialism), KEIZAIGAKU DAIJITEN (ENCYCLOPEDIA OF ECONOMICS), Toyo Keizai Shinpo-Sha, 1980.

Socialist Republic of Vietnam, VIETNAM : A DEVELOPMENT PERSPECTIVE, 1993.

World Bank, CHINA COUNTRY ECONOMIC MEMORANDUM : REFORM AND THE ROLE OF THE PLAN IN THE 1990S, 1992.

World Bank, Vietnam : TRANSITION TO THE MARKET, 1993.

YABUKI, Susumu, CHUGOKU NO KEIZAI (THE ECONOMY OF CHINA), So-So Sha, 1992.
Administration, the emphasis has shifted away from market mechanisms toward the introduction of a kind of industrial policy. Meanwhile, in the countries of Latin America, export-oriented economic liberalization has been advancing in the 1990s, which improved the macroeconomic performance. The large countries of India and Egypt are also moving toward free market economies. Of course, almost all other developing countries in need of IMF or World Bank financing are working to introduce market mechanisms still further. In other words, as the movement toward deregulation and economic liberalization has gained in momentum worldwide, especially from the 1980s on, attention has focused in the 1990s on the optimal policy mix of market mechanisms with government intervention.

The role of government is to intervene in market failures. Textbooks show the following examples of the Pareto-inefficient cases in which the public sector plays the role of increasing returns to scale, public goods, externalities, and imperfect information (see Stiglitz 1988a).

In addition, Stiglitz (1988b) illustrates the role of government in the development process as follows: undersaving, financial intermediaries, barriers to the flow of capital, shortage of skilled labors, landlord's resistance of innovation, and inappropriate technology.

## 1 -3-3 Economic Growth and the Role of Government

After macroeconomic stability has been reached, macroeconomic growth becomes a major issue for the state. Economic growth requires high levels of productivity growth, and what improves productivity is technological progress. Technology is then disseminated through investments in physical and human capital and through trade. In recent years, attention has been focused especially on the diffusion of technology through investments in human capital and through trade.

In one sense, “The East Asian Miracle” was epoch-making. Its contents were already foreshadowed in the Development Report by the World Bank in 1991. Its main point was a more positive affirmation by the World Bank of government intervention in the course of development. Let us explain this point in more detail below, according to the World Bank (1993).

Viewpoints regarding the role of government in economic development are divided here into three categories by the World Bank.

(1) The Neoclassical View

(2) The Market-Friendly View

(3) The Developmental State View

The Neoclassical View (1) proposes the following four roles for government in support of development.

(i) Stabilization of the macroeconomy

(ii) Establishment of rules for the promotion of competition domestically and internationally

(iii) Promotion of international trade and abolition of price controls

(iv) Investment in human resources (education and health)

The Developmental State View (3) calls for sector-specific industrial policy as adopted by Japan and Korea. The World Bank does not endorse such policies. The reason is that implementation of such policies requires such things as a technocratic elite of special
competence, and it is difficult to establish such conditions in nearly all developing countries. On the other hand, the Market-Friendly View (2) calls for an even greater role for government than the roles proposed by the Neoclassical View (1). The fundamental concept behind this view is competitive discipline: it allows for government intervention aimed at the promotion of competition. A type of government involvement is called “selective interventions”. In the course of market failure, this intervention focuses on the following factors: (i) coordination failures between public sector and private sector

## (ii) credit rationing

## (iii) information-related externality

These three factors have become topics of heated debate among economists in recent years. Nevertheless, it must be noted that these factors run contrary to the role of government in relation to sector-specific industrial policy as postulated by the Developmental State View. In response to coordination failures (i), as well as the exchange of information (iii), the role played by deliberation councils in Japan in the coordination of the public and private sectors has been highly esteemed. What is more, with respect to credit rationing, deliberation council policy calling for contest-based competition through corporate contests has also won high esteem. Nevertheless, in implementing these policies, government officials of outstanding competence are required. Generally speaking, it is not likely that these policies can be adopted effectively in other developing countries.

In particular, the World Bank (1993) approves of export promotion as government intervention policy. East Asia is divided into two major categories according to the World Bank.

(a) Northeast Asia (Japan, Korea, etc.), where exports have been promoted in accordance with the Developmental State View (sector-specific industrial policy).

(b) Southeast Asia (Thailand, Malaysia), where exports have been promoted in accordance with the Market-Friendly View.

The type of export promotion practiced in Thailand, Malaysia and Indonesia, which depends upon direct foreign investment and market competition through incentives rather than selective interventions, is being advanced in other developing countries as the “export-push” strategy.

For export promotion in Northeast Asia by the World Bank, the following measures were taken:

(i) Provision of export credit

(ii) A duty-free system for related enterprises to promote exports

(iii) Establishment of export targets

(iv) Preferential tax treatment system

(v) Monitoring: adjustments were made continuously, and steps were taken to upgrade industries.

(vi) Effective use of information-related externality through exchange of information.

Nevertheless, these policies were not always successful, as witnessed in the course of industrialization of the heavy and chemical industries in Korea.

The definition of the Developmental State View by Murakami (1992) is different from the World Bank regarding the following:
(i) Private ownership and market competition

(ii) Industrial policy

(iii) Export promotion

(iv) Policy to foster small-and medium-scale industries

(v) Redistribution of income

(vi) Egalitarian policy for farmers

(vii) Education

(viii) Modern bureaucracy

In contrast, the following Market-Friendly policies were implemented in the Thailand-Malaysia model [B] by the World Bank (1993).

(i) Creation of a free-trade environment for exporters

(ii) Financing and support services to small-and medium-size exporters

(iii) Improvement of trade-related government services

(iv) Incentives for exports-oriented, direct foreign investment

(v) Preparation of infrastructure for exports

Moreover, at the time of government intervention, the following four principles are demonstrated.

(i) The targets of intervention are concentrated in fields where market mechanisms do not function.

(ii) Objectives are established and various policies in line with these objectives are implemented

(iii) Endeavors by the private sector are evaluated fairly and systems for providing bonuses are introduced

(iv) Upon achievement of the objective, intervention is ceased and the market mechanisms are allowed to function freely.

From the above analysis, the conclusion of the World Bank is that government intervention should be of the market-friendly type as exemplified by the Thailand-Malaysia model.

Nevertheless, the following three problems can be noted with this approach.

(1) In the Thailand-Malaysia model, if we assume that export-oriented, direct foreign investments have played a major role, the question becomes whether or not other developing countries have enough attractive features, like the countries of Southeast Asia, to invite foreign investments. If a country has problems with national security or political instability, for instance, these can become great hindrances.

(2) In principle, the World Bank is opposed to application of the Developmental State View to other developing countries, but it acknowledges the role of coordination failures, credit rationing and information-related externality in supplementing for market failures under selective intervention. It also esteems the role of inter-corporate contests as a mode of competitive discipline under the Developmental State View. Hence the Bank is not opposed to all sector-specific industrial policies. The following question thus arises: Is it not possible to consider intervention policies aimed at preparing conditions so that industrial policies are maximized for the promotion of competition?

(3) Is it not possible to find the optimal policy mix of the Developmental State View with the Market-Friendly View, and search for ways to apply the model to other developing countries? These questions have become important topics. (Kuchiki)
Chart 1-1 Development Policy
## REFERENCES

Lucas, R. E., “Making a Miracle,” Econometrica, Vol.61, No.2, pp.251-272, 1993.

Murakami Yasusuke, Han-Koten no Seiji Keizaigaku (Political Economy of Anti-Neoclassical Paradigm, Chuo Koron-Sha, 1992.

Stiglitz, J. E., Economics of the Public Sector, W. W. Norton & Company, 1998a.

Stiglitz, J. E., “Economic Organization, Information, and Development,” Handbook of Development Economics, Vol.1, North-Holland, 1988b.

Stiglitz, J. E. Economics, W. W. Norton & Company, Inc., New York, 1993

Stiglitz, J. E. & B. C. Greenwald, “Financial Market Imperfections and Business Cycles,” Quarterly Journal of Economics, Feb., pp77-114, 1993.

World Bank, The East Asian Miracle, 1993.
Chart 1-1-2

GDP GROWTH (%)

□ CHINA + VIETNAM ◇ MONGOLIA △ HUNGARY × POLAND ▽ ROMANIA

Chart 1-I-3

INFLATION (%)

□ CHINA + VIETNAM ◇ BULGARIA △ HUNGARY × POLAND ▽ ROMANIA

Chart 1-1-4

SECTORAL SHARE OF GDP (%)
Table 1-1-1

EMPLOYMENT BY TYPE OF ENTERPRISES (%)

1978	CHINA 1984	1991	RUSSIA 1985	1991
State Owned Enterprises	18.6	17.9	18.3	93.1	86.1
Collective Enterprises	72.0	67.0	63.9	6.0	5.3
Township-Village Enterprises	4.3	7.6	10.0	N. A.	N. A.

Source: Sachs and Woo [1993]

Chart 1-I-5

(MERCHANDISE EXPORTS ($ BILLION)

(Notes) * reduced to 1/3

** doubled
a 'full-fledged' market economy.

## 2 -4-3 Regional Externalities

Finally, more emphasis should be placed on the difference in location of each transition economy. That is, we are going to discuss the role of 'regional externalities.' The collapse of the CMEA regime is seen to have had a serious negative impact on those economies dependent on it. While we may be able to call this an external diseconomy due to formal regional disintegration, China as well as Vietnam have enjoyed external economies generated by natural or informal integration through trade and capital flows in the Pacific Asia.

Before the reform, China was not only less dependent on CMEA trade, but also on external trade in general than Eastern Europe and even Vietnam. During the process of transition, China has been opening up and its dependence on external trade has increased rapidly, which must have much to do with dynamic development of the region as a whole (see Chart 1-I-5). This is without doubt a good example of a virtuous circle of trade, investment and economic growth. Unfortunately, this sort of environment could not be found in Eastern Europe and the former Soviet Union.

Increased interdependence through trade and capital flows would not only expand available opportunities, but also bring in additional beneficial impacts such as technology transfers, policy management skills, and discipline through international competition. This is generally the point to make in explaining the dynamic growth in the Asia Pacific region as well as, in particular, the case of China, where several authors stressed the role of ethnic Chinese communities in the Asia Pacific in the financial, commercial and technical developments.

## 2 -5 Concluding Remarks

We have discussed that the experiences of structural adjustment in Latin America cannot be applied straightforwardly to the transition economies. We have also examined the different recent economic performances across the transition economies and identified some determinant factors in initial conditions, policy strategies and external environments. What policy implications have we learned so far?

One simple lesson can be drawn from the above. Successful results can be obtained even by an incomplete set of policy packages. ‘Partial reforms’ in China are a good example $ ^{4} $ . There would be no unique all-weather or all-purpose policy strategy for transition such as either ‘big bang’ or ‘gradualism’. Appropriate policy strategies to each individual economy in transition would depend on initial conditions, policy management, external environments, and so on. Partial reforms in China may be disastrous to some other transition economies, for example $ ^{5} $ .

It seems that we have returned to the original point where the best mix of market and government has been pursued. The issue of the transition to a market economy urges us to learn more about the nature of the desirable relationship between the market and government.

(Kohsaka)
## FOOTNOTES

1/ For example, Bruno [1992, p.742] writes, “In that superficial respect the adjustment and structural reform problem of Eastern Europe would seem to be akin to that of other middle-income countries, such as Brazil, Mexico, or Israel;…The delayed effects of some of these shocks are only now being felt in Eastern Europe. …the distance between the initial point and the desired goal is not only wider but substantially deeper.”

2/ Generally, in order to identify initial conditions, we must pinpoint the start of economic reforms. The transition economies, however, have experienced various reform attempts at various stages. Thus, instead of pursuing exact years of transition attempts, we regard the conditions at the collapse of the CMEA regime as initial, because it is convenient for a comparative analysis of the recent diverse performances among those economies.

3/ 'Market failures' do not necessarily justify government intervention. Namely, whenever the market fails, the government could also fail. Thus, there are adequate interventions and inadequate ones.

4/ See Rawski [1994]. He also writes, “There was no clear strategy and no planned sequence of reform measures. Policy makers responded to a succession of problems and opportunities with ad hoc improvisation (p.272).”

5/ The point here can be summed up as ‘Chinese skepticism toward the recommendations of globe-trotting consultants untutored in local economic structures and institutions (Rawski [1994])’ not being a bad thing.
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Blanchard, Olivier Jean and Stanley Fischer, eds., NBER macroeconomics annual, 1993, MIT Press, 1993.

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