Student: Marat Roisenberg
Supervisor: Janusz Szyrmer
Revised and extended: December 1994
In 1988 the economies of the Eastern European countries were in many ways similar. The common bond between them lay in the socialist model of development with emphasis on heavy industry and large monopolistic firms which facilitated the central control p rocess. They were economies driven by central planning rather than market mechanisms. Each eventually recognized the failure of its economic philosophy and opted for a transition to a more market oriented system. Concurrently, as Fischer and Gelb, point out, all these countries were moving toward increased political pluralism. But today, as these nations are in the midst of both economic and in some respects political reform, it is clear that some are having more success than others in altering t heir system. In fact, the very nature of the reform process itself has varied greatly from nation to nation. So this brings up the question of how it is possible for nations with such similar backgrounds to experience these varied results?
The answer to this question is not a simple one as there are a tremendous amount of factors involved in the transformation of an economic system. But as Fischer and Gelb suggest, the answer may lie in examining the initial conditions in these Eastern Eur opean countries when the reforms began. In order to analyze these initial conditions, it is first necessary to identify what they are by categorizing them and to place them in a framework where they can influence any economic outcome. The economic outcom model (Gregory and Stuart) does just that by showing the initial variables that influence economic outcome and determining how strongly these independent variables influence the outcome. The model basically looks like the following:
O=f(ES, POL, ENV)
where:
O = economic outcome
ES = economic system
POL = policies pursued by economic system
ENV = environmental factors
A model presented herein attempts to explain and in some ways to predict the varying direction and success of reforms in Eastern Europe based on initial economic and political conditions. The basis for my entire study is the following model:
H=f(EV,SVs)
where:
H =Hidden Unemployment
EV =Economic Variable (1993 GNP/capita)
SVs=Survey Variables
Eleven East European and Central Asian economies are included in my model: Belarus, the Czech Republic, Hungary, Kazakhstan, Lithuania, Poland, Russia, Slovakia, Slovenia, Ukraine, and Uzbekistan. In the model, hidden unemployment is defined as that part of the labor force which is officially employed but is not producing output. This is excessive labor force that could be laid off without any loss to output (GNP). Its employment is made possible by different forms of state subsidies to enterprises. Hi dden unemployment is used in the model as a proxy for the lack of reform. I am making the assumption that if there is a high degree of subsidizing, then the reform process is not being fully implemented. So a high hidden unemployment value means low lev els of reform in an economy. The hidden unemployment is calculated by the following equation:
Hidden Unemployment % = 100 * [Actual Employment (1993)-Theoretical Employment (1993)]/[Actual Employment (1993)]
The theoretical employment figure for 1993 is calculated by taking the employment figures for 1988 for each country and multiplying them by the percentage change in GNP between 1988 and 1993. The justification for this operation is that generally employme nt levels move in the same direction as GNP in normal economic situations.
As for my independent variables, EV stands for economic variable. The economic variable is GNP (Gross National Product) per capita in current U.S. dollars in 1993 for each of the eleven countries. The purpose of this variable is that it provides a proxy for the initial economic conditions1. The SVs stands for survey variables, which come from The New Democracy and Local Governance Leadership Survey Questionnaire (Jacob, Ostrowski, and Teune). for the initial economic conditions1. The SVs stands for survey variables, which come from The New Democracy and Local Governance LeadeThis questionnaire was given to local level politicians in the above mentioned countries to gauge their perception of market reforms, capitalism and democracy. I believe that this extensive survey, in which hundreds of people were polled, is representative of the attitudes of the general populations, and the refore the information extracted from it is useful. There are four different responses to the survey questions. Each response had the following numerical value attached to it: 1-strongly agree, 2-agree, 3-disagree, 4-strongly disagree.
The values for the responses to selected questions for each country were plugged into the regression model previously mentioned.
As I mentioned before, the purpose of my model was to explain the varying direction and success of reforms in different Eastern European countries based on initial economic and political conditions in those countries. The public's perception at the start of reform could be a valuable indicator of the ensuing success of reform. This perception can either drive reform to success or lead it to failure.
I assume that this variable reflects a level of overall economic development during the transition period.
Bibliography Appendix
December 1994
The table below present the data used in the analysis and the results.
Variables:
UNEMP HIDDEN UNEMPLOYMENT, %
GNP GNP/CAPITA, 1993, DOLLARS
CAPT306 PRIVATE SYSTEM IS FAIR
CAPT310 COMPETITION IS WASTEFUL
ECDE4 NO ECONOMIC DEVELOPMENT IF HARDSHIPS
As shown (Model 1)
, hidden unemployment (UNEMP) is negatively related to GNP
(correlation coefficient = -0.639) and CAPT306 (-0.067). It is positively
related to the two remaining survey variables: CAPT310 (0.143) and ECDE4
(0.399). These findings make a lot of sense. Countries which are less
eager to introduce a radical economic reform tend to be less developed
(lower GNP per capita) with more anticapitalist and antimarket feelings,
i.e., their political leaders are more likely to agree with the
statements like:"Private system is not fair" (the inverse of CAPT306),
"Competition is wasteful" (CAPT310), and "No economic development policy
may cause hardships to the population" (ECDE4), while the first two
variables express support/resistance for/to the market oriented reforms,
the last one is a proxy for the opposition to the so-called shock therapy,
i.e., to rapid radical reforms that, in their initial stage, would bring
about a significant decline in standards of living of a large part of
population. Two linear regression models were run. Model 1 included all eleven countries. In this model, hidden unemployment was expressed as a function of GNP, CAPT306, CAPT310 and ECDE4. All its regression coefficients but that for CAPT306 were highly significant. This model, however, suffered from at least two problems: (i) some degree of collinearity in independent variables (see the table of correlation coefficients for Model 2). So did the regression coefficients and the corresponding t statistics.
Overall, these findings confirm, that the radical reform is more likely to succeed in the countries at a higher level of economic development, where the popular support for private ownership, market competition and fast reform are more solid.