Working Paper: CEPR ID: DP1442
Authors: Micael Castanheira; Gerard Roland
Abstract: We present in this paper a bench-mark model for the optimal speed of transition from a state-owned to a private market economy, based on the consumption-savings decision in a closed economy. This bench-mark model abstracts from rigidities or frictions to focus on the macroeconomic conditions for accumulation of private capital and closure or restructuring of state-owned enterprises (SOEs). It is shown that an excess rate of closure of SOEs, compared to the welfare optimum, generates a substitution effect that accelerates the pace of transition, and an income effect, that slows down transition. When the latter effect dominates, too high a speed of closure of SOEs may result in suboptimally slow growth of the private sector. This will especially be the case if such a deviation occurs at an early stage of transition. Lastly, the model sheds some light on macroeconomic contraction in Central and Eastern Europe in the early phase of transition.
Keywords: Transition in Eastern Europe; Optimal Speed; General Equilibrium; Transitional Dynamics
JEL Codes: E21; E61; P41; P51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| excess rate of closure of SOEs (L32) | substitution effect (D11) |
| excess rate of closure of SOEs (L32) | income effect (D12) |
| income effect dominates (D11) | suboptimal growth in the private sector (O17) |
| too slow scrapping of state assets (H13) | limits resources for new enterprises (P12) |
| limits resources for new enterprises (P12) | discourages investment (G31) |
| too rapid closure of SOEs (P31) | reduces national product (H69) |
| reduces national product (H69) | negatively impacts total savings (D14) |
| excess closure (Y60) | stronger welfare losses (D69) |
| early excess closures (G14) | slow down transition process (C41) |
| later closures (J65) | speed up transition process (P21) |
| policies aimed at accelerating sectoral reallocation (J68) | slowdown of investment (E22) |
| higher growth rates (O49) | greater welfare losses (D69) |