Marketizing reforms are often suggested as remedies for the problems that plague socialist economies. Introducing market reforms is a complex problem. This article examines the obstacles to such reforms. It employs an institutional-choice perspective to study the conditions that are necessary to make marketization effective and discusses the likely outcomes of incomplete marketization.
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References
1.
1. See B. Lippincott, On the Economic Theory of Socialism (Minneapolis: University of Minnesota Press, 1938).
2.
2. For a more optimistic appraisal of market socialism, with respect to China, see Gregory Chow, “Market Socialism and Economic Development in China” (Econometric Research Program Research Memorandum no. 340, Princeton University, Dec. 1988).
3.
Hough argues that the “biggest obstacle to radical economic reform in the Soviet Union is not political or bureaucratic opposition, but the immense inherent difficulty of achieving the goals of reform itself.”Ibid., pp. 45-46.
4.
4. Gertrude E. Schroeder, “Soviet Economic Reform Decrees: More Steps on the Treadmill,” in Soviet Economy in the 1980s: Problems and Prospects, by U.S. Congress, Joint Economic Committee (Washington, DC: Government Printing Office, 1982), pt. 1.
5.
5. For an excellent introduction to this literature, see Oliver Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985).
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The latter involves a change in the way prices are determined. Jan Prybyla, Market and Plan under Socialism: The Bird in the Cage (Stanford, CA: Hoover Institution Press, 1987), pp. 49-53.
7.
7. Quoted in Hough, Opening up the Soviet Economy, pp. 46-47.
8.
8. F. A. Hayek, The Fatal Conceit: The Errors of Socialism (Chicago: University of Chicago Press, 1989).
9.
9. The importance of the “legacy of central planning” in analyzing economic reforms in the Soviet Union is emphasized in Hewett, Reforming the Soviet Economy, p. 234.
10.
10. “Economic outcomes in market economies appear to depend on detailed features of the institutional structure....Given this, it would be absurd to prescribe for Hungary and other Eastern bloc countries merely that they should move towards a market economy, or market socialism. These terms are unacceptably vague and fail to specify how the above institutional features should be arranged.”Paul Hare, “Economic Reform in Eastern Europe,”Journal of Economic Surveys, 1(1):54 (1987).
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11. The limitations on entry and exit contained in the Soviet Law on the State Enterprise are noted in Richard Ericson, “The New Enterprise Law,”Harriman Institute Forum, 1(2):7 (Feb. 1988).
12.
12. Bela Balassa, “The Firm in the New Economic Mechanism in Hungary,” in Plan and Market, ed. M. Bornstein (New Haven, CT: Yale University Press, 1973), pp. 356-357.
13.
13. Most reforms - for example, the Hungarian reforms or perestroika - maintain ministerial output plans, even though the enterprise plans are discontinued. In the case of perestroika, the Law on the State Enterprise retains ministerial responsibility with respect to “satisfaction of demand for their [that is, ministerial] products, for productivity increases, for product quality, product and process innovation in their branches, and for the maintenance of a progressive capital structure.” Ericson, “New Enterprise Law,” p. 8.
14.
14. The term is Janos Kornai's; see, for example, Kornai, “The Hungarian Reform Model,”Journal of Economic Literature, 25(4) (Dec. 1986). In contrast, an enterprise with a soft budget constraint - the typical case in socialist countries - receives subsidies from the state to meet any losses.
15.
15. Indeed, many lose money at existing prices, though the implications of this are hard to untangle, when prices do not reflect opportunity costs. Under the current price system it is probably a blessing that bankruptcy laws are not enforced - they are on the books in most socialist economies.
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16. Harding, for example, notes that the fear of inflation on the part of the leadership in China stems from their memory of its effect on the Kuomintang in the late 1940s. Harry Harding, China's Second Revolution (Washington, DC: Brookings Institution, 1987), p. 279. Hewett notes with respect to perestroika that “unless far more attention is given to the use of competitive pressures to automatically control the natural inflationary pressures during the transition, the resulting inflation will create enormous pressures for retrenchment that will not be without justification.” Hewett, Reforming the Soviet Economy, p. 353. One might also note the contribution of price increases to unrest in Poland that eventually led to the birth of Solidarity.
17.
17. For example, in the Soviet Union. See Gregory Grossman, “A Note on Soviet Inflation,” in Soviet Economy in the 1980s: Problems and Prospects, by U.S. Congress, Joint Economic Committee (Washington, DC: Government Printing Office, 1982), pt. 1.
18.
18. “Although the reform's vision of autonomous, self-financing, socialist business firms threatened with bankruptcy for failure conveys an aura of markets and competition, it is, in fact, an artificial accounting construct, both under present Soviet conditions and under those created by the reforms.... The belief that large gains in efficiency will accrue from self-finance under such conditions (i.e. fixed prices) is a grand illusion.”G. Schroeder, “Gorbachev's Economic Reforms,” in Gorbachev's New Thinking, ed. R. D. Leibowitz (Cambridge, MA: Ballinger, 1988), p. 65.
19.
19. To put it another way, central planning may be the most effective way to direct an economy when prices do not reflect opportunity costs. This might explain why the treadmill seems so steep.
20.
20. See, for example, Prybyla, Market and Plan under Socialism, pp. 204-213.
21.
21. “But the actual introduction of competition was not compatible with just any kind of industrial structure. It was clear that competition had no place in a hierarchical economy in which the associations supervised production in each sector and controlled sales; the declared intention of promoting competition in Czechoslovakia from 1965 onwards was thus doomed to failure.” Asselain, Planning and Profits, p. 145.
