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Structural Change in Transition Economies: Does Foreign Aid Matter?

Author

Listed:
  • Mohsen Fardmanesh

    () (Temple University)

  • Li Tan

    (American International Group)

Abstract

This paper addresses whether the initial declines in the manufacturing and real wages in transition economies were anything unexpected to justify policy reversal, and whether the “often-recommended” foreign aid would have helped them curb these declines in any significant way. It answers these questions with the help of a two-sector three-factor small open economy model and simulation exercises. It concludes that, given the relative price distortions and the market disequilibria that transition economies inherited from their planning era, the initial declines in their manufacturing and real wages are to be mostly expected. Foreign aid, whose impact is noticeable only when it is in excess of 5% of GDP, does not curb the decline in their real wages in any measurable way and exacerbates the decline in their manufacturing by a few percent.

Suggested Citation

  • Mohsen Fardmanesh & Li Tan, 2009. "Structural Change in Transition Economies: Does Foreign Aid Matter?," Working Papers 982, Economic Growth Center, Yale University.
  • Handle: RePEc:egc:wpaper:982
    as

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    File URL: http://www.econ.yale.edu/growth_pdf/cdp982.pdf
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    References listed on IDEAS

    as
    1. Fardmanesh, Mohsen & Tan, Li, 2003. "Wage and price control policies in transition economies," Journal of Development Economics, Elsevier, vol. 70(1), pages 173-200, February.
    2. Michael Bruno & Jeffrey Sachs, 1982. "Input Price Shocks and the Slowdown in Economic Growth: The Case of U.K. Manufacturing," Review of Economic Studies, Oxford University Press, vol. 49(5), pages 679-705.
    3. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-848, December.
    4. Jac C. Heckelman & Stephen Knack, 2008. "Foreign Aid and Market-Liberalizing Reform," Economica, London School of Economics and Political Science, vol. 75(299), pages 524-548, August.
    5. Berndt, Ernst R & Wood, David O, 1975. "Technology, Prices, and the Derived Demand for Energy," The Review of Economics and Statistics, MIT Press, vol. 57(3), pages 259-268, August.
    6. Calvo, Guillermo A & Coricelli, Fabrizio, 1992. "Stagflationary Effects of Stabilization Programs in Reforming Socialist Countries: Enterprise-Side and Household-Side Factors," World Bank Economic Review, World Bank Group, vol. 6(1), pages 71-90, January.
    7. Michael Bruno & Jeffrey Sachs, 1982. "Input Price Shocks and the Slowdown in Economic Growth: The Case of U.K.Manufacturing," NBER Working Papers 0851, National Bureau of Economic Research, Inc.
    8. Stanley Fischer, 1991. "Economic Reform in the USS and the Role of Aid," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 289-302.
    9. Commander, Simon, 1992. "Inflation and the Transition to a Market Economy: An Overview," World Bank Economic Review, World Bank Group, vol. 6(1), pages 3-12, January.
    10. Goldstein, Morris & Officer, Lawrence H, 1979. "New Measures of Prices and Productivity for Tradable and Nontradable Goods," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 25(4), pages 413-427, December.
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How not to model transition economies
      by Economic Logician in Economic Logic on 2010-02-22 21:21:00

    More about this item

    Keywords

    liberalization; structural adjustment; transition economies; East European economies; Soviet Republics; foreign aid;

    JEL classification:

    • P2 - Economic Systems - - Socialist Systems and Transition Economies

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