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Financial Control in the Transition from Classical Socialism to a Market Economy

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  • Ronald I. McKinnon
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    Abstract

    The transition from socialism to capitalism poses severe problems of financial management that have yet to be resolved in principle, let alone in practice. One unfortunate consequence is continual financial turmoil as socialist economies of the Soviet Union and Eastern Europe attempt reform. Inflation, either open or repressed, first accompanies and then undermines attempts to decentralize decision-making. But why should the transition from central planning to a market economy be inflationary? Understanding the system of financial control in the preexisting regime of "classical" socialism is the key to understanding what might go wrong in the transition. I discuss how in a more deliberate transition, domestic tax and monetary arrangements might be managed to keep the average price level stable as the market prices of individual goods and services become free to fluctuate, and suggest complementary policies governing tariffs and foreign exchange convertability in the move toward free foreign trade.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.5.4.107
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    Bibliographic Info

    Article provided by American Economic Association in its journal Journal of Economic Perspectives.

    Volume (Year): 5 (1991)
    Issue (Month): 4 (Fall)
    Pages: 107-122

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    Handle: RePEc:aea:jecper:v:5:y:1991:i:4:p:107-22

    Note: DOI: 10.1257/jep.5.4.107
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    1. McKinnon, Ronald I., 1979. "Money in International Exchange: The Convertible Currency System," OUP Catalogue, Oxford University Press, number 9780195024098.
    2. János Kornai, 1986. "Contradictions and Dilemmas: Studies on the Socialist Economy and Society," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262111071, December.
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