A Framework for the Economic Transformation of Czechoslovakia
The goal of this paper is to contribute to the discussion about the optimal way to transform the Czechoslovak economy from a centrally planned to a decentralized market system. Since no formal theory of such a trnsition exists, the approach adopted in this paper is to combine stylized facts about the Czechoslovak economy with theoretical concepts and empirical insights from other economies that have undergone various forms of economic stabilization, adjustment and reform. Since the consistency of any package of reform measures is crucial for the success of a trnsition, the ideas in this paper are presented as a complete framework. However, the paper should not be interpreted as a concrete proposal, but rather should be viewed as an illustration of how one might go about constructing a consistent blueprint for transfoming the economy. The assumption of the paper is that the goal of the economic transformation is to move the economy from a relatively inefficient, centrally planned system, marked by a lack of incentives and a distorted structure of prices and quantity allocations, to a more efficient, market-oriented system based on competitive forces. In other words, the assumed goal is to move the economy to a higher welfare equilibrium with as little transitional cost as possible. While the Czechoslovak economic situation is lanentable in comparison to that of Western economies, it is still attractive relative to the circumnstances of most refonning socialist economies. In particular, as Zieleniec et al. (1989) document, compared to Western economies Czechoslovalia has experienced a major deterioration in relative living standards as measured by GDP per capita, productivity, personal consumption, ecological indicators, qlity of infiasftucuz, health standards, access to and quality of education, and other criteria. Yet, compared to most of the reforming socialist (and many mniddle income developing) economies, Czechoslovakia still has a fairly solid technical strucure of the economy, significant human capital that could be