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You are here: Home > Current Topics > Mind your Business > 01 December 2003 |
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Transition Economies:
The move to a market based economy from a planned system brings many problems. Russia's Gross Domestic Product (GDP) is currently around $1.35 trillion ($1,350,000,000,000) (£81 billion) compared to the UK which stands at $1.52 trillion (£91 billion). The population of Russia is over 144 million compared to that of the UK which is 60 million. The GDP per capita for Russia is $9,300 (£5,580) whereas for the UK the figure is $25,300 (£15,180). Following the collapse of the communist regime, many price controls were removed which led, in 1992, to inflation rates of 2,520%. Current rates of 15% seem to be small by comparison and is a measure of the progress that Russia has made in adapting to a market system. Unemployment also rose following the introduction of market reforms; the very notion of unemployment was not something many Russians were used to under panning system and as such represented a massive culture shock and a source of resentment. Unemployment rates currently stand at around 7% but it is difficult to be precise about the true extent of such problems because of the widespread existence of an informal economy. Many of the governments problems have stemmed from corruption and an inability to impose a sufficiently robust taxation system that is adhered to by the population as a whole.
Other problems that have been a feature of the transition involve the removal of all manner of restriction on trade both within and outside Russia. Much of the trade under the planned system was with Russia's satellite republics - Poland, Ukraine, Georgia and so on; the market system has meant that western powers can now seek to invest in Russia, engage in trade and equally Russia has to find its way into a financial and trading world which many Russians simply did not have any experience of. The notion of marketing products was alien and the extensive privatisation that has had to be undertaken has necessitated a very steep learning curve for those involved - the Russian stock exchange for example is still relatively new! The problems faced by Russia are typical of those being experienced by most of the so-called 'transition economies'. Potentially they represent burgeoning new markets with massive resources and economic potential but the problems along the way also make for a very volatile political and economic mix that can, as highlighted in Georgia over the past week, lead to explosive situations. |
Command Economies. Command economies or Planned economies were a feature of those countries referred to as 'communist' regimes - mostly in Eastern Europe centred on the Union of Soviet Socialist Republics (USSR) a collection of states under the economic and political control of Russia. The planned aspect referred to the process of resource allocation. The needs of the population and the country were effectively planned and resources allocated to achieve desired production in capital and consumer goods. The notion that 'communism' means 'equality' is far too simplistic. It is true to suggest that income disparities were far less than in most western countries. In Russia in 1991, the average wage ranged between £18 and £40 per month, those at the top end may have been doctors, professors at universities, engineers and computer technicians and those at the lower end cleaners, factory workers and so on, but such differences in wages are significantly less than we might expect in the west!
It is this type of culture that is so different to that which those brought up on a diet of markets are used to. Investment in the USSR may have been directed towards projects that would bring benefits for the nation as a whole rather than for certain individuals or the few. The staging of the Olympics' in 1980 for example, was designed in part to show off the ability of Russia and the Soviet Union to stage a major event and to demonstrate the athletic prowess of its sports men and women.
Effectively, central planning meant that production units were given targets for output and resources were given that should allow those targets to be met. Economic growth would be achieved through progressive increases in the targets and reductions in the inputs. In reality it appeared that the targets were often not met and if not there was very little by way of retribution! In addition, all manner of manipulation to the targets could be achieved partly because there was little personal incentive for anyone to achieve beyond the target, in fact if the targets were not met it meant that there was less work to do! It seemed that the link between individual performance and the impact on the nation as a whole ('the common wealth'?) was lost.
Inefficiency was rife, waste and pollution at alarming levels, the lack of high quality information for the planners and the ability to be able to communicate the plans effectively all led to economic decline and, as the eighties drew to an end, the gap between the wealth and economic power of the west and that of the Soviet Union was rapidly widening. Incomes were set at a level that allowed people to be able to afford the items necessary to live, the prices of which in turn, were set by the planners. So, visiting Moscow in 1991, it was revealing to note that the price of an underground trip in Moscow worked out at 1/10th of 1p! This makes travel affordable for all but takes no account of the relative demand and supply of the items. It was estimated that some 40% of all Soviet agricultural output was wasted; in the supply chain from planting to purchase by the consumer it had rotted, been lost or wasted in some way!
A classic example of the mismatch of information in the system centred on the need for shoes and an excess of rubber. Shoes were in short supply so it made logical sense to use the surplus of rubber to make shoes. Production was geared up but it would come as no surprise to learn that rubber shoes are not the most elegant or functional of items. The result was a 'shoe mountain' and a waste of all the resources that went into the planning and manufacture of the shoes! The combined effect of all these factors led to immense pressures on the economy. Many people in the Soviet Union would not have recognised the notion of being paid for a job well done or the idea of customer service. In the west the penalty for poor customer service and inefficiency is, in the end, bankruptcy and loss of jobs; in the Soviet Union this did not happen because unemployment was, to all intents and purposes zero.
A housing development in the suburbs of St Petersburg in Russia, 1992. Housing can be made available for everyone but some would question the quality of life of its residents under a planned economic system.
After the collapse of the 'communist regimes' and the break up of the Soviet Union, the Eastern part of Europe became a patchwork of nation states who rapidly gained independence from Russia but who, having been dependent for so long on Moscow, found the transition from a planned to a market economy an intensely painful experience. The massive structural changes needed, regardless of the cultural adjustments, have proved a massive challenge to governments throughout the region. Some, like Poland, the Czech Republic and Hungary have emerged from the process with some credit while others are still struggling to adjust. The events of the week 20th - 27th November 2003 in the former Soviet Republic of Georgia are testament to the problems these countries face.
Total 50 Marks
http://www.photius.com/wfb1999/russia/russia_economy.html - Facts and figures plus general reports on a range of countries
http://www.economist.com/countries/Russia/profile.cfm?folder=Profile%2DEconomic%20Structure
http://www.economist.com/displaystory.cfm?story_id=104982
http://www.economist.com/displaystory.cfm?story_id=201732
http://www.economist.com/displaystory.cfm?story_id=271149 - a range of news items on transition economies from 'The Economist'.
http://www.russiansabroad.com/History.asp - very useful potted history of Russia both before and after the collapse of the communist regime.
http://www.cia.gov/cia/publications/factbook/ - The Central Intelligence Agency (CIA) World Factbook - very useful resource!
The answer to this question makes one big assumption - that the prices fixed by the planning authorities were significantly below the normal expected market equilibrium. Prices in a planned system do not act as signals as is the case under a market mechanism. The price is merely something that is used to enable people to have some element of choice as to what they wish to spend their income on. Because they do not act as a signal, they in no way reflect the relative levels of demand and supply and prices that we, under a market system, would expect to see rising and falling in response to changes in market conditions. The evidence given points to the huge amount of wastage in a planned system and as such, it is likely that supply is likely to have been progressively shifting to the left over time. This combined with the price being set below equilibrium explains why prices rose so dramatically. In meeting the command to 'use supply and demand analysis' you may wish to refer to http://www.bized.co.uk/educators/16-19/economics/markets/presentation/pricecontrol1.ppt which offers a step by step view of the effects of price controls.
To access the full range of the marks, ensure that your diagram is clear, well annotated and includes a concise written explanation that relates to the case study being considered. The marks are split 50/50 for the diagram and the written explanation.
This is a question that will expect you to be able to make judgements about the relative costs and benefits of a planned economic system. The fact that there are still many in Russia who talk fondly of the 'old days' would suggest that, for some of the population at least, there were features of the system that they liked. In part the answer depends on an appreciation of the cultural differences between countries. The photograph of the housing development may provoke a number of thoughts - for many, such a development looks quite horrendous but the fact that there were very few homeless people in Russia may be something that we, in the west, could learn from! Ensure that when you consider the costs and benefits that you refer to the provision of public and merit goods as well as using production possibility frontiers to discuss choices in the way in which a government seeks to allocate resources. The reference in the evidence to the Olympic Games in 1980 (despite being severely hampered by political developments) highlight another feature of such economic systems. Think about the number of times that you have heard or read about athletes and sports people in the UK complaining about the lack of investment in them? How long did it take before the construction of the new Wembley Stadium actually began?
To balance out your answer, consider factors such as the lack of incentive, the problems of trying to gain sufficient information to allow effective planning as well as the restrictions on enterprise and initiative that are said to be the driving forces behind market systems and which have led to the huge choice and quality of goods and services at our disposal as well as the relatively high standard of living that most of us enjoy.
To really get into the 'evaluation' mode, ensure that you make some judgments about the relative costs and benefits that you identify. If, for example, you feel that the benefits of having zero unemployment and very few homeless people is a massive plus to any economy then you need to try to express why such principles are so important. Try to ensure that you have as balanced an answer as possible and arrive at some form of summary conclusion that relates back to the question. For fifteen marks - think of 6 each for the consideration of the costs and the benefits and three for the summary conclusion.
To answer this question successfully, you will need to do some additional research to find out what has happened in Russia in the last ten years. The suggested links should give you more than enough information to work on. Use data, where appropriate, to support the points you are trying to make and again remember that this is a question heavily weighted towards the higher order skills of analysis and evaluation. In presenting your argument, you will have to consider key economic indicators and what trend they are demonstrating. You will also need to consider whether the country has the right combination of financial and physical infrastructure to support a market system as well as a sufficient cultural understanding and acceptance of such a system. The establishment of a stock exchange was a major step in helping the newly privatised companies in Russia to be able to raise capital for expansion and development but how much the country has developed integrity in financial circles is going to be crucial in whether the west continues to invest much needed resources into the country. There is also the problem of the vast sprawling nature of the geography of the country to consider and the extremes of climate. Russia has tremendous natural resources but how easy are they to exploit? All these issues should become more obvious as you carry out your research.
Ensure that you organise the information your collect carefully; plan your answer to ensure that you deal with the key issues in a logical and coherent manner. The question allows you to draw a conclusion with regard to the 'extent' to which Russia has made progress - your conclusion should be informed by the analysis you have given - is it a great deal, some considerable way or has the country got a long long way to go yet? Remember to ensure that your judgements are supported.
