Structural Adjustment, Efficiency, and Economic Growth

This paper is intended to make four main points that are relevant for previously planned economies in transition to a market economy. First, national output can be increased by reducing or eliminating relative price distortions through price reform and free trade and by thus enhancing macroeconomic efficiency at full employment. Second, the static output gain from removing a single distortion in a two-sector general equilibrium model with full employment can be captured in a simple formula in which the gain is approximately proportional to the square of the original distortion. Third, substitution of plausible parameter values into the simple formula indicates that the permanent, static output gain from structural adjustment may be large in practice. Fourth, in the end, after the economic transformation has been completed, not only will output per head be higher than initially, but it will probably grow more rapidly than before. The potential dynamic output gain from economic reform is also shown to be substantial.