Table Of ContentUnderstanding
Economic Transitions
Plan and Market Under the
New Globalization
Berhanu Abegaz
Understanding Economic Transitions
Berhanu Abegaz
Understanding Economic
Transitions
Plan and Market Under the New
Globalization
Berhanu Abegaz
Department of Economics
William & Mary
Williamsburg, VA, USA
ISBN 978-3-031-21583-4 ISBN 978-3-031-21584-1 (eBook)
https://doi.org/10.1007/978-3-031-21584-1
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To my esteemed teachers and students
Preface
Around 1990, about a quarter of the world’s population lived in middle-income
socialist economies and another quarter in high-income and middle-income cap-
italist economies. The remainder lived in low-income economies with varying
admixtures of planning, markets, and informal exchange institutions. Forty years
later, the remaining outposts of socialism are Cuba and North Korea, while a few
others (mainly in the former states of the Soviet Union) wallow in the no man’s
land of neither functional capitalism nor socialism.
The USSR sustained seven decades of statist socialism between 1922 and
1992, Central Eastern Europe (CE) and Southeastern Europe (SEE) for nearly
five decades, and China for a little over three decades. By 2000, nearly all have
systemically “transitioned” from a centrally-planned economy to some form of a
decentrally organized market economy.
How and why large parts of Europe, Eurasia, and East Asia transitioned out
of the capitalist system in 1917–1952, how they managed to industrialize in
non-market settings, and how and why they came back to the capitalist fold
are questions comparative economic systems seek to address. Furthermore, this
wrenching structural change entailed a concomitant political transition from a
monoparty system to an illiberal multiparty system in formerly socialist Europe
and the former Soviet Union (FSU).
Comparative Economic Systems (CES) focuses on the workings of institu-
tional economic mechanisms across economic systems and income levels. CES, at
the macro-, meso-, and micro-levels, dwells on the two foundations of an economic
system: ownership types for productive assets (state vs. private) and the degree of
centralization of decision-making over resource allocation and income distribu-
tion (plan vs. market). The conceptual entry points are incentives (known rewards
or residual legatee rights) and the sources of discipline (bureaucratic-based or
market-based competition). More broadly, Comparative Economics (CE), which
is broader than CES, melds the study of economic systems with historical insti-
tutionalism and development economics to explore the determinants of prosperity
and inequality properties over time and across economic space within a given
economic system.
The conventional approach to the study of twentieth-century economic systems,
which obsessed with Cold-War-tinged concerns, has ebbed and flowed with the
vii
viii Preface
changing power balance between East and West. What has endured, though, is the
ever-changing mix of State and Market under various national and global contexts.
Understanding Economic Transition employs the CE prism to analyze dual
transitions in the former Socialist bloc—from a nonindustrial to an industrial econ-
omy and from a centrally-planned to a market-driven economy. These transitions
have been accompanied by corresponding changes in the political system—ini-
tially from one form of authoritarianism to another and, later, from paternalistic
accountability to democratic accountability.
More specifically, this book seeks to explain the genesis, operation, and trans-
formation of the centrally-planned socialist economy. It takes full account of the
impact of the system’s demise coinciding with a shift from a nonindustrial to an
industrial economy (and de-industrialization in some cases) and from a trade-based
globalization to a production- and trade-based globalization. Incorporating theory,
the latest research findings, cross-country empirics, and representative country case
studies (Russia, China, Poland, and Vietnam), the book also teases out the endur-
ing lessons from the fraught pathways of systemic transition from socialism to
capitalism in the age of the new globalization.
In addition to representing distinct country experiences, the four case studies
account for a sizable chunk of the world economy. IMF data for 2020 (in pur-
chasing parity US dollars) show that the four countries together accounted for 22
percent of the global GDP of $135 trillion. China, the largest economy in the
world since 2015 (www.pwc.co.uk/economics), accounted for $24 trillion, Russia
for $4.4 trillion, Poland for $1.3 trillion, and Vietnam for $0.85 trillion. Interest-
ingly, the four countries also represented 22 percent of the world’s nearly 8 billion
people—the 2022 figures being for China (1.45 billion), Russia (145 million),
Vietnam (100 million), and Poland (40 million).
This volume provides a self-contained, comprehensive, up-to-date, and authori-
tative treatment of post-1917 economic systems. The book has four novel features
that distinguish it from what is on offer in this sub-field of economics: (i) using the
prism of comparative institutionalism, it melds theory and the available evidence
to revisit the varieties of planned and market-driven systems; (ii) it takes economic
planning seriously in both theory and practice (central, cooperative, or indicative)
as a prominent marker of the ever-changing interactions between State and Mar-
ket; (iii) it focuses on the dynamics of systemic transitions in formerly socialist
countries by using a cohesive organizing framework that addresses the whence
(central planning), the how (modalities of transition), and the whither (illiberal
or liberal capitalism); and (iv) it examines the profound impact on these struc-
tural processes of the ICT-based economic globalization. The twinning of politics
and economics, the former posited as the primary driver, is one of the key ideas
invoked for understanding the rise and fall of economic systems.
Practically speaking, this book serves two purposes. Firstly, as a conspectus, it
is a reference monograph on current thinking on post-socialist transition from a
state-centered to a market-centered system. Secondly, it can be used as a panoramic
textbook for CES-focused courses that take central economic planning seriously
in a variety of contexts.
Preface ix
Instructors with an interest in the why and the how of the workings of the
centrally-planned economies and the socialist structural reforms will find a cohe-
sive theoretical and empirical survey and a critical synthesis. Toward this end,
the book provides chapter extracts, extensive glossary of key concepts, explainer
boxes and vignettes, and an appendix on data sources to help readers follow the
sometimes-dense discussions of ideas and practices.
I wish to thank generations of students in my courses on central planning and
post-socialist transition for their perceptive questions and encouragement to turn
the disparate lecture notes into a coherent book. Joshua Link has my gratitude
for formatting the text per the guidelines. I am also grateful to MIT Press for
permission to reproduce much of the material for Box 1.2, the World Bank Group
for Box 2.2, and Routledge for Figure 9.3.
Williamsburg, VA, USA Berhanu Abegaz
November 2022
Introduction
Comparative economics is central to economics
because what makes for a good economic system
is, or should be, the most important question that
economists ask.
Josef Brada (2021)
This volume critically synthesizes the vast and growing literatures on the insti-
tutional mechanisms that define modern economic systems—market, planned, or
cooperative. It draws on the various theories of political economics and scrutinizes
the evidence for competing explanations. The book comprises eleven chapters that
stitch together a compelling account of central planning in its diverse dialects,
demise, and replacement by variants of capitalism in far-flung country settings.
Key concepts, flagged in boldface the first time they are invoked, are defined
in the Glossary. An extensive bibliography and data sources are included to help
readers to dig deeper. A synopsis of the book’s four parts and their constituent
chapters is as follows.
Part I, Theories of Comparative Economic Systems, introduces the book by
distilling the core ideas that inform the study of central planning and economic
systems. The relevant literature on institutional economics and varieties of cap-
italism and socialism provides as a springboard for exploring how and why a
stable equilibrium of doubly exclusionary institutions of socialism may give way
to either partially exclusionary disequilibria or doubly inclusionary equilibria that
we associate with liberal capitalism.
Chapter 1, Economic Systems, does three things. It introduces the analytical
tools of comparative economics. An economic system is a set of cohesive insti-
tutions—formal and informal rules that guide behavior. The chapter develops the
book’s organizing concept, the “institutions hypothesis.” The core idea is that the
way societies organize themselves, by shaping positive and negative incentives, is
critical for understanding the differences in the level and sharedness of prosperity.
The chapter also leverages the interlinkages between ownership rights and con-
trol rights to property to show that, theoretically speaking, the justifications for the
superiority of a private-market system and a market-socialist system are identical.
xi
xii Introduction
This framing, developed by Lange and Stiglitz, provides a template for delineating
model and muddle that continues to bedevil the debate on the subject.
Chapter 2, Economic Planning in Various Settings, does two things. Utilizing
the perspective of comparative and integrative “varieties of economic systems,”
it affirms the value of looking for institutional similarities in form, not just dif-
ferences, for understanding the genesis and performance of economic systems.
This chapter also provides a survey of the major theories and practices of eco-
nomic planning in the context of the myriad forms of really-existing capitalism,
socialism, and market-led cooperativism (the Yugoslav and Mondragon models).
Part II, Two Canonical State Socialisms, explores the procedures and processes
followed in pre-reform USSR and China to allocate scarce resources and distribute
income. The classical Soviet planning model served as an instructive template for
latecomer socialist economies.
Chapter 3, The Soviet CPE I: The Planning Process in an Industrialized Econ-
omy, provides a detailed account of three features: the historical emergence of
command-and-control central planning, the Stalinist State’s organizational struc-
tures to govern the economy, and the rule-of-thumb procedures for drafting annual
and five-year plans. The chapter delves into the economic and political rationale
for such phenomena as organizational parallelism, nomenklatura, and hierarchi-
cal decision-making. It also connects the mechanics of Soviet planning with the
insights (and limitations) offered by the planning theories surveyed in Chapter 2.
Chapter 4, The Soviet CPE II: Plan Implementation, reviews the procedures
and the challenges of implementing the plans. It begins by characterizing the
planned economy’s endemic characteristics, including pervasive shortage, soft bud-
gets, quantitative bias, low product quality, and continual improvisation. It then
explains why enterprises and planners behaved the way they did as the incon-
sistencies and the tautness built into the paper plan become evident, including
effectuating changes in assortment, storming, cross-subsidization within ministries,
manipulation of bonus funds, and resort to the underground economy.
Chapter 5, The Chinese CPE: Planning in a Semi-industrial Economy, provides
an overview of Chinese central planning, including how it resembles or differs
from the Soviet model. The chapter begins by identifying the Chinese economy’s
peculiarities and proceeds to explore how the Chinese unitary political system’s
decentralized nature shaped the division of authority between the Center and the
Periphery.
Part III, Systemic Transition in Theory and Practice, critically explicates the
tenets of competing theories and perspectives on post-socialist transition. These
ideas inform the contrasting country experiences with structural reform that
encompass the gamut of post-socialist experiences. It also contextualizes the coun-
try experiences by taking a bird’s-eye-view of reform in Eastern Europe, FSU, and
East Asia.
Chapter 6, The Nature of Post-socialist Transitions, presents an analytical frame-
work for thinking deeply about systemic transition. It begins by presenting the
most recently available data on the pre-reform economy’s performance in terms
of growth and inequality. The chapter goes on to introduce the lexicon of reform,
