The Output Decline in Central and Eastern Europe: A Classical Explanation
AbstractThe paper discusses the strong output decline in the countries of Central and Eastern Europe. It starts from the puzzling observation that the former CSFR, Hungary and Poland experienced a relatively similar decline in output in spite of completely different stabilization and transformation policies. Using an aggregate supply/demand (AS/AD) framework it can be shown that there are obvious `real' causes for an output drop. The command economy was characterized by a dual disequilibrium (labour market and goods market). The removal of the high excess employment leads to an inevitable drop of natural output and employment together with a reduction of real wages. This is amplified by a downward shift of the production function, mainly because of lack of corporate governance. With very flexible nominal wages, the transitional economy can be represented by the `classical' version of the AS/AD model, which suggests that the theoretical basis for demand-side explanations is rather weak. This supply-side view is compatible with the popular explanation given by Calvo and Coricelli, but their evidence for a `credit crunch' in Poland is not very strong. The paper also discusses the `Soviet trade shock' as a possible cause for the output drop. It shows that Hungary and Poland -- and to some extent the CSFR -- were able to compensate their loss of CMEA exports by expanding their exports to the West, so that an overall trade shock cannot be observed. The `classical' explanation of the output decline rules out policies stimulating demand. What is required is a framework enhancing the transfer of resources from state-owned enterprises to the emerging private sector.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 784.
Date of creation: May 1993
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Find related papers by JEL classification:
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
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- repec:ner:leuven:urn:hdl:123456789/251277 is not listed on IDEAS
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