Working Paper: CEPR ID: DP9003
Authors: Wendy Carlin; Mark E. Schaffer; Paul Seabright
Abstract: Two decades after the end of central planning, we investigate the extent to which the advantages bequeathed by planning in terms of high investment in physical infrastructure and human capital compensated for the costs in allocative inefficiency and weak incentives forinnovation. We assemble and analyse three separate types of evidence. First, we find that countries that were initially relatively poor prior to planning benefited more, as measured by long-run GDP per capita levels, from infrastructure and human capital than they sufferedfrom weak market incentives. For initially relatively rich countries the opposite is true. Second, using various measures of physical stocks of infrastructure and human capital we show that at the end of planning, transition countries had substantially different endowmentsfrom their contemporaneous non-transition counterparts. However, these differences were much more important for poor than for rich countries. Finally, we use firm-level data to measure the cost of a wide range of constraints on firm performance, and we show that aftermore than a decade of transition in 2002-05, poor transition economies differ much more from their non-transition counterparts, in respect to both good and bad aspects of the planning legacy, than do relatively rich transition countries. However, the persistent beneficial legacy effects disappeared under the pressure of strong growth in transition economies in the run-upto the global financial crisis.
Keywords: business environment; infrastructure; institutions; planned economy; transition
JEL Codes: O43; P21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial poverty (I32) | greater benefits from planning (O22) |
| imposition of planning (P11) | poorer economic outcomes in rich countries (P17) |
| initial poverty (I32) | persistence of beneficial effects of planning (C41) |
| quality of institutions and market incentives (O17) | economic outcomes (F61) |