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Big Bang vs. Gradualism: Why Were Economist too Optimistic about the Transformation in Eastern Europe and USSR and Why Is th
Working paper
Yew-Kwang Ng
October 1994 |
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It is now rather ciear that most Western economists (the present writer inciuded) were too optimistic about the big-bang transformation in Eastern Europe and the former Soviet Union (EEFSU hereafter) around the time of its commencement around 1989-1992. Most expected only moderate falls of output and rclativcly quick and strong recovery and growth. 8 actual
falls have been much larger and the recovery has yet to take place, with the moderate exception of Poland. It seems that many economists had not taken sufficient account of relevant institutional factors. Just as the fish takes water for granted, we Western economists take many institutionai factors important for the functioning of a’market economy for granted.
The importance of institutional factors have been emphasised by a number of researchers (e.g.Clague 1992, Clague 8r Rausser 1992, Eister 1994, Murreii 1992, Olson 1992, Shleifer 1994,Williamson 1994). In the next section, I discuss a factor which may partly explain why economists were too optimistic. This concerns the predominant rebance on the model of a
perfectiy competitive market economy and the point that such an economy adjusts much better to shocks than non-perfectly competitive (including monopoiistic competitive, oiigopoiistic,and monopolistic) market economies and non-market or semi-market economies in the real world, including EEFSU. Taking the higher adjustment costs for such real-world economies
into account tends to favour a graduaI transformation process.
The economic success so far of China may aiso suggest that the Chinese way of gradual transformation (“crossing the river by gropping for the stones”) may be preferabie. In Section 3, it is argued that the Chinese
lesson is not so dear cut as there are a number of significant differences between China and EEFSU and as there are some unsoived problems in China. |
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| Last updated on: 12/20/2006 |
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