Working Paper: CEPR ID: DP911
Authors: Thorvaldur Gylfason
Abstract: This paper is intended to make four main points that are relevant for previously planned economies in transition to a market economy. First, national output can be increased by reducing or eliminating relative price distortions through price reform and free trade and by thus enhancing macroeconomic efficiency at full employment. Second, the static output gain from removing a single distortion in a two-sector general equilibrium model with full employment can be captured in a simple formula in which the gain is approximately proportional to the square of the original distortion. Third, substitution of plausible parameter values into the simple formula indicates that the permanent, static output gain from structural adjustment may be large in practice. Fourth, in the end, after the economic transformation has been completed, not only will output per head be higher than initially, but it will probably grow more rapidly than before. The potential dynamic output gain from economic reform is also shown to be substantial.
Keywords: structural adjustment; efficiency; economic growth
JEL Codes: F11; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reducing price distortions (D41) | national output (E23) |
| price reform and free trade (F13) | national output (E23) |
| efficiency of resource allocation (D61) | output per head post-reform (O49) |
| effective use of productive resources (D24) | higher growth rates (O49) |
| 25% increase in efficiency (H21) | 25% growth rate per year (O44) |
| static output gain from removing a single distortion (C69) | original distortion (Y60) |