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Shock Therapy Versus Gradualism Reconsidered: Lessons From Transition Economies After 15 Years Of Reforms

  • Vladimir Popov

    ()

    (NES)

This paper starts by separating the transformational recession (reduction of output in most transition economies in the first half of the 1990s) from the process of economic growth (recovery from the transformational recession) in 28 transition economies (including China,Vietnam and Mongolia). It is argued that the former (the collapse of output during transition) can be best explained as adverse supply shock caused mostly by a change in relative prices after their deregulation due to distortions in industrial structure and trade patterns accumulated during the period of central planning, and by the collapse of state institutions during transition period, while the speed of liberalization, to the extent it was endogenous, i.e. determined by political economy factors, had an adverse effect on performance. In contrast, at the recovery stage the ongoing liberalization starts to affect growth positively, whereas the impact of pre-transition distortions disappears. Institutional capacity and reasonable macroeconomic policy, however, continue to be important prerequisites for successful performance.

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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0068.

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Length: 35 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:cfr:cefirw:w0068
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  1. Gérard Roland, 2000. "Transition and Economics: Politics, Markets, and Firms," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182033, June.
  2. Berta Heybey & Peter Murrell, 1999. "The relationship between economic growth and the speed of liberalization during transition," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 3(2), pages 121-137.
  3. Blanchard, O & Kremer, M, 1996. "Disorganization," Working papers 96-30, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Campos, Nauro F., 2000. "Context is everything : measuring institutional change in transition economies," Policy Research Working Paper Series 2269, The World Bank.
  5. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1992. "The Transition to a Market Economy: Pitfalls of Partial Reform," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 889-906, August.
  6. Gerard Roland & Thierry Verdier, 1997. "Transition and the Output Fall," William Davidson Institute Working Papers Series 37, William Davidson Institute at the University of Michigan.
  7. Polterovich, Victor & Popov, Vladimir, 2003. "Accumulation of Foreign Exchange Reserves and Long Term Growth," MPRA Paper 20069, University Library of Munich, Germany.
  8. Atkeson, Andrew & Kehoe, Patrick J, 1996. "Social Insurance and Transition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 377-401, May.
  9. Vladimir Popov, 2000. "Shock Therapy Versus Gradualism: The End Of The Debate (Explaining The Magnitude Of Transformational Recession)," Comparative Economic Studies, Palgrave Macmillan, vol. 42(1), pages 1-57, April.
  10. Oleh Havrylyshyn & Ron van Rooden, 2003. "Institutions Matter in Transition, But So Do Policies," Comparative Economic Studies, Palgrave Macmillan, vol. 45(1), pages 2-24, March.
  11. Sergio Godoy & Joseph Stiglitz, 2006. "Growth, Initial Conditions, Law and Speed of Privatization in Transition Countries: 11 Years Later," NBER Working Papers 11992, National Bureau of Economic Research, Inc.
  12. Krueger, Gary & Ciolko, Marek, 1998. "A Note on Initial Conditions and Liberalization during Transition," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 718-734, December.
  13. Lau, Lawrence J & Qian, Yingyi & Roland, Gérard, 1997. "Pareto-Improving Economic Reforms through Dual-Track Liberalization," CEPR Discussion Papers 1595, C.E.P.R. Discussion Papers.
  14. Kaufmann, Daniel & Kaliberda, Aleksander, 1996. "Integrating the unofficial economy into the dynamics of post-socialist economies : a framework of analysis and evidence," Policy Research Working Paper Series 1691, The World Bank.
  15. Polterovich, Victor & Popov, Vladimir, 2005. "Appropriate Economic Policies at Different Stages of Development," MPRA Paper 20066, University Library of Munich, Germany.
  16. de Melo, Martha & Denizer, Cevdet & Gelb, Alan, 1996. "Patterns of Transition from Plan to Market," World Bank Economic Review, World Bank Group, vol. 10(3), pages 397-424, September.
  17. Polterovich, Victor & Popov, Vladimir, 2005. "Democracy and Growth Reconsidered: Why Economic Performance of New Democracies is not Encouraging," MPRA Paper 21606, University Library of Munich, Germany.
  18. de Melo, Martha & Denizer, Cevdet & Gelb, Alan & Tenev, Stoyan, 1997. "Circumstance and choice : the role of initial conditions and policies in transition economies," Policy Research Working Paper Series 1866, The World Bank.
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