[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Wrap-Up
THE COMMUNIST SYSTEM IN THE
SOVIET UNION
The government owned the means of production and determined what should be
produced and how it should be produced under a system of central planning.
Because wages and prices were set by the government, they could not function to
balance supply and demand. Shortages were common and many goods were rationed.
By the 1980s, the failures of Soviet agriculture and Soviet industry’s inability to keep
up with rapid innovation in the West led first to attempts at economic and political
reform and then to the collapse of the Soviet Union.
THE MOVE TOWARD A MARKET ECONOMY
Russia and many of the other new republics quickly moved toward a market economy.
They believed that replacing the inefficient central planners with markets and
the price system would solve their economic woes. Private property would provide
incentives. Free trade would provide competition; a supply of inputs to Russia’s factories;
a supply of consumer goods to Russia’s consumers, who had been deprived
of so much for so long; and a ready market for what Russia produced. The cornerstones
of its strategy were thus privatization and liberalization—eliminating the
myriad constraints that marked the Soviet system. Replacing the inefficient Soviet
system thus was bound to raise living standards. The optimists thought it would
happen overnight; the pessimists, that it might take six months or perhaps a year.
What happened in the next decade came as a surprise. For most of the countries,
growth in the decade after the beginning of the transition was slower than
growth during the decade before the transition. The economy of the former superpower
has shrunk to the point where it is comparable with that of the Netherlands
or Denmark. Social statistics reflect the deteriorating economic conditions: life
spans are shorter, and divorce rates are higher. While 2 percent of the population
was in poverty at the beginning of the transition, a decade later the number was
estimated to be approaching 40 percent.
There are some exceptions to this bleak picture: Poland has a GDP today that is
50 percent higher than it was a decade ago, and China, another country making the
transition from central planning to a market economy, has seen its income quadruple
over the past twenty years.
What accounts for these transition successes and failures? To be sure, because
each country began the transition in different circumstances, some had an advantage
over others. Poland and several of the other Eastern European countries had
a higher standard of living before becoming communist than did Russia; China had
a much lower level of income. The countries of Eastern Europe had easier access
to Western markets, and the lure of entry into the European Union helped speed
up the reforms required for admission. Some countries, like Uzbekistan, are landlocked,
a limitation that poses distinct problems. A few countries have been plagued
810 ∂ CHAPTER 36 DEVELOPMENT AND TRANSITION