Hungary on the Road to a Mixed Economy: A Kaleckian Computable General Equilibrium Approach

The change from a centrally planned economy into a market economy is likely to have created a unique situation in economic history. Consequently, no existing economy theory is able to depict the process of transformation. It is argued in this paper that a Kaleckian theoretical approach may provide a starting point for the analysis of the formerly centrally planned economies of Central and Eastern Europe. This approach is applied to Hungary, within the framework of a computable general equilibrium model. A number of policy measures, such as wage constraint, devaluation and mark-up reduction, are considered and their effects on production, inflation and income distribution assessed.     

Property rights for natural resources and sustainable growth in a two-country trade model

We analyze a dynamic two-country trade model between a technological leading country and a technological follower economy. The output production in the follower economy needs a renewable natural resource as an essential input. We first prove that the innovation developed in the leading country guarantees sustainable growth in this economy. Moreover, trade of innovation also enables sustainability in the resource-dependent economy. We analyze different property rights regimes depending on whether the resource is managed by a central authority (a monopoly firm in the leading economy or the government in the follower country) or the exploitation rights are equally distributed among many harvesters in the follower country. The second main goal of the paper is to analyze how the ownership and distribution of the exploitation rights upon the natural resource may affect the sustainable growth rate for the two trading economies, the resource conservation and the consumers’ welfare. We obtain the standard result that the resource is better preserved when owned by a monopolistic agent (either a foreign firm or the government). When the property rights belong to a monopoly located in the leading country, the two economies grow faster than when they belong to either the government or many owners in the follower country. When the resource is monopoly-owned, consumers in the leading economy attain a higher welfare when the monopoly is located in this country, but the equivalent is not true for consumers in the follower economy. The comparison of welfares with the case of multiple owners is unclear.     

Exploring a Regional Technical Efficiency Frontier in the Former USSR

Using 1971–90 panel data from a Siberian province, two econometric methods are used side by side to examine technical inefficiency with a suggestion as to how the methods might be used in sequence. Estimates derived from a random effects method reveal that technical inefficiency is both substantial and not time invariant. Results using either a random or fixed effects method suggest that existing estimates of technical inefficiency in centrally planned economies may be biased downward because of the choice of the estimation method. Using either method, the increasing technical inefficiency found is likely to be one cause of the decline in the performance of centrally planned economies and their regions.     

The role of interest rates during the transition to a market economy

We construct a simple two period model of an economy in transition from being centrally planned to being market oriented. Using this model, we draw certain positive conclusions about economic policies that reduce distortions during the transition period. In particular, we focus on the role of interest rates, a market parameter that has previously been almost entirely ignored in planned economies. Using stylized data derived from Czechoslovakia, we show that increase in nominal interest rates can actually be welfare-improving by partially compensating for the distortions induced by the transition process.The model is sufficiently general to be applied to a number of transition economies, and we use the cases of Czechoslovakia, the USSR, and China as examples of some of the phenomena that we are trying to explain. We show that the model generates a constrained, suboptimal equilibrium. In particular, we see that raising interest rates during the transition period reduces repressed savings, brought about by shortages in the controlled market. An improvement in consumer utility can therefore be brought about.A large part of the work in this paper was carried out while I was a Visiting Scholar in the Research Department of the International Monetary Fund. I would like to thank Mario Blejer, Nadeem Ul-Haque, and Sweder Van Wijnbergen for helpful comments. The views expressed here do not necessarily represent the opinions of the International Monetary Fund.     

Expansionary effects of the welfare state in a small open economy

We examine the relationship between welfare state policies and economic performance in a small open economy with (i) free trade in final goods and international capital mobility, and (ii) aggregate increasing returns to scale. Contrary to the conventional wisdom, we find that a retrenchment of welfare programmes is not an inevitable consequence of economic integration. Instead, by improving the exploitation of aggregate scale economies, social expenditure policies and international openness complement each other in facilitating an improvement in economic performance that can sustain a more generous welfare protection.     

Fragmentation in simple trade models

This paper examines the effects of “fragmentation,” defined as the splitting of a production process into two or more steps that can be undertaken in different locations but that lead to the same final product. Introducing the possibility of fragmentation into simple theoretical models of international trade, the paper finds the effects of fragmentation on national welfare, on patterns of specialization and trade, and on factor prices. Models examined include the Ricardian Model and the Heckscher-Ohlin Model, both for small open economies and for a two-country world. Results are as follows: 1. If fragmentation does not change the prices of goods, then it must increase the value of output of any country where it occurs and that of the world. 2. If fragmentation does change prices, then fragmentation can lower the welfare of a country by turning its terms of trade against it. 3. Even in a country that gains from fragmentation, it is possible (but not necessary) that some factor owners within that country will lose. 4. To the extent that factor prices are not equalized internationally in the absence of fragmentation, fragmentation may be a force toward factor price equalization.     

COMPUTATIONAL CONTROVERSIES IN DISEQUILIBRIUM AND SHORTAGE MODELLING OF CENTRALLY PLANNED ECONOMIES

Abstract. Most disequilibrium and shortage models of centrally planned economies fall into three categories: testable excess demand (the Portes school), disequilibrium indicators, and Kornai's economics of shortage. These models have generated numerous controversies and conflicting empirical results. However, this paper argues that some disputes are not caused by the theoretical features of the models but rather by the utilisation of different estimation methods that are not directly comparable. This suggests that several controversies are more apparent than real and can be resolved through the improvement of computational techniques and statistical hypothesis testing theory.     

INTERNATIONAL TRADE IN MINING PRODUCTS

Abstract The increase in mineral price volatility since 1970 and worries about the impact of rapidly growing mineral exports on the economic growth of developing countries have created recent interest in mineral trade flows and policies. This paper provides a review of current thinking on the economics of international trade in mining products. Despite mining products’ importance in early formulations of trade theory, there have been relatively few studies that have specifically examined mining product trade flows. The limited evidence that exists supports the idea that factor endowment differences explain much mining product trade. There is some apparent South–South and intra‐industry trade in mining products, but we find no need to resort to the ‘new trade theory’ to explain this. Given worries of substandard growth and development in mining‐based economies, trade policies have been used to try to accelerate the movement towards resource‐based manufacturing. In the light of recent evidence that mining product exporters have not suffered in the long‐run from mining activity, these policies are likely to have been unwarranted. Nevertheless, there is some evidence that the more closed mining economies have had faster growth than the open mining economies, reflecting correction of a political economy trap that causes open mining economies to under‐invest in education.     

Optimal design of trade institutions

We model an economy with social institutions that facilitate trade and induce three types of costs: establishment costs, access costs, and use costs. Use costs are specific transaction costs related to the use of these trade institutions. We assume that a trade institution is economically completely determined by the costs it imposes and by the effects on the trades it facilitates. We extend the Pareto efficiency concept to include various modes of organization of social institutions: the costs and benefits of these organizations are expressed in the trades they facilitate.Within this setting we discuss a valuation equilibrium concept, in which all agents use a common conjectural price system that assigns to every trade institution the price vector that would prevail under it. This feature of the equilibrium is important in securing the second welfare theorem, and is new to the analysis of economies with costly trade. Since the use costs can be nonlinear, there are non-convexities that prevent the second welfare theorem from obtaining in a finite economy, but we show it for large economies.Received: 3 April 2002, Accepted: 30 April 2003, JEL Classification: D59, D70, H49Robert P. Gilles: donewhile visiting the Center for Economic Research, Tilburg University, Tilburg, The Netherlands. Financial support from the Netherlands Organization for Scientific Research (NWO), grant B46-390, is gratefully acknowledged.Dimitrios Diamantaras: Part of this research wasSupport from Temple University via a Fuller research fellowship is gratefully acknowledged.The authors would like to thank Suzanne Scotchmer, Andreu Mas-Colell, Marcus Berliant, Shlomo Weber, Hans Haller, Dhanajay Gokhale, Julian Manning, and two anonymous referees for their valuable comments and discussions of previous drafts of this paper. A previous version of this paper was circulated as Equilibria of economies with costly trade.     

The development of the role of the audit in the Czech Republic

As the economies in Central Europe have commenced their transformation from centrally planned to market-led economies, each country has implemented a new legal framework for accounting and auditing. This provides a unique opportunity to research the implementation of aspects of accounting and auditing well known to Western market economies into different economic contexts. In particular, it provides an opportunity to revisit the role of the independent audit. This paper contributes to the research on the developing of auditing in Central Europe by analysing the role of the audit in the Czech Republic. It covers aspects of both regulation and practice and, in order to gain more understanding of how the audit role is developing in the Czech Republic, focuses on three areas: influences on the Czech audit legislation; the position of the audit report and perceptions of the objectives of the audit in the Czech Republic. After a brief review of the published literature on accounting and audit in the Czech Republic, the paper studies some of the country's recent economic and legislative developments in relation to auditing. These developments are put into the context of auditing before and after the ‘Velvet revolution’ of 1989. The paper then concentrates on the influences on the development of Czech audit legislation by comparing aspects of the Czech audit legislation with the German and UK equivalents. This comparison highlights some anomalies in the Czech legislation. The Czech audit legislation is then put into the local context based on a review of the contents of the audit report and its publication with interviews among a selection of users and preparers about how the audit is perceived.     

Wage determination in late socialism: The case of Poland

Does economic transition necessitate a profound change in the inter-industry wage structure? This paper argues that principles of wage determination in centrally planned economies were not basically different from those prevailing in market economies. Even if the center became involved in wage setting, reward for human capital and the compensating differential had to be taken into consideration. Moreover, market power led to rent-sharing via wage bargaining and efficiency wages. Hence, this paper claims that wages in socialist economies were determined by similar factors to those in market economies. This is supported by comparison of inter-industry wage structures between socialist and capitalist countries and by results of the estimation of the wage equation for Poland. There is a noticeable degree of similarity in wage structures generated by both systems.I started this paper when I was a research visitor at the Centre of Economic Performance, London School of Economics and completed it when I was a visiting fellow at Princeton University. While at Princeton University I was financed as a Fulbright Fellow.I am grateful to David Card, Hartmut Lehmann, Marcus Rubin, Mark Schaffer and an anonymous referee for their helpful comments and suggestions. I also wish to thank the participants of the seminars at the Industrial Relations Section of Princeton University and at the University of Maryland for useful discussion. The usual disclaimer applies.     

Interaction between central planners and firms: The uncertainty of target adjustment

Conclusions The interaction between planners and firms in a centrally planned economy has already been treated by a number of authors. They have generally focused upon the firm's performance in the face of various reward structures and have, with the exception of Gindin (1970) and Snowberger (1977), not dealt explicitly with the feed-back effect this performance has on the planners' adjustment of the reward structure for the future. This paper has extended the previous analysis of the feedback mechanism into the case where a firm knows that the planners have the power to make such adjustments but does not know precisely what form they will take. We have developed models which reflect several different ways in which a firm might respond to this uncertainty. Furthermore, we have introduced an adjustment scheme which considers the performance of all firms in the industry when setting a target for any one of them, in addition to treating the ordinary assumption that a firm's future target depends only upon its own present underor overfulfillment.8060 Niwot Road, # 19, Longmont, Colorado 80501, USA.     

Endogenizing the provision of money: Costs of commodity and fiat monies in relation to the value of trade

We consider the problem of including the costs and value of the institutions that define money and support trade, within the framework of economic optimization. We compare monetary systems mediated by durable commodity monies, versus pure fiat monies, in order to understand the separation and eventual independence of the institutionally-created value of money from the values of underlying traded goods. We treat the emergence of monetary function as a problem in mechanism design, modeled by minimal strategic market games that overcome a generalized Jevons failure when agents must commit ahead of time to specialist resource production. We consider in particular the problem of defining closures with respect to both money flows and labor-allocation and trading decisions, and show that minimal models require many of the fundamental institutions of banking and contract enforcement found in real economies, in order to define a self-policing system. We define costs, value, and the efficiencies of the institutions that support trade in terms of a natural money-metric welfare function, and compare the characteristics of commodity and fiat monies by these measures. Through careful treatment of the stock/flow distinction in repeated-game settings, we find that commodity money, even when its value derives heavily from its institutional role, remains defined by its flow characteristics, in contrast to fiat money, for which the control function is defined inherently in terms of stock variables. Our notation is somewhat nonconventional for economics but to do justice to econo-physics concepts such as scaling and dimensional analysis and to stress the distinction between stocks and flows, we believe this notation is justified. We provide a full listing of notation in Appendix A.     

Bilateral trade between India and Bangladesh: A general equilibrium approach

India and Bangladesh have pursued policies of trade liberalization since the early 1990s. However, owing to the differential speeds of opening up, Bangladesh's bilateral trade deficit with India widened substantially over the years. This aggravated the economic and the political tensions between the economies. It has been held that promotion of free trade between the two economies may enhance the trade and hence economic cooperation between them. Against this backdrop the present paper proposes a theoretical framework that provides a general equilibrium determination of the commodity pattern of trade and hence locates the comparative advantages of the economies. The empirical implementation of the model considers trade in 25 sectors comparable in the input–output tables of the economies. The study isolates the gains from free trade accruing to either economy. The paper also explores the pattern of bilateral trade when each economy produces goods by utilizing their own as well as the other country's technology. The gains from this trading arrangement are also isolated.     

Dynamic gains from North American free trade in an equilibrium model of the current account

The benefits of economic integration in North America are explored by quantifying the gains that the two small open economies of the region can obtain from free trade in financial assets as a vehicle to smooth consumption. Numerical simulations of a stochastic intertemporal equilibrium model are used to estimate the effects of free financial asset trading on economic activity and welfare. The results suggest that in Mexico, where business cycles have been larger and access to world markets has been more limited, free asset trading would produce more benefits that in Canada, where the risk of business cycles is smaller.     

The Marshallian Industrial District,an organizational and institutional answer to uncertainty

The object of this paper is to clarify the Marshallian ideas of agents, markets and evolution that make up his concept of the industrial district. The industrial district is interpreted as an organizational and institutional answer to uncertainty. Its longevity depends on the strategies of the local economic actors, the fruition of external economies and its adaptation to a particular trade and technological environment. These propositions are illustrated with regard to contemporary industrial history.     

Design of exploration and minerals-data-collection programs in developing areas

This paper considers the practical problem of applying economic analysis to designing minerals exploration and data collection strategies for developing countries. Formal decision rules for the design of government exploration and minerals-data-collection programs are derived by using a minerals-industry planning model that has been extended to include an exploration function. Rules derived are applicable to centrally planned minerals industries as well as market-oriented minerals sectors. They pertain to the spatial allocation of exploration effort and to the allocation of activities between government and private concerns for market-oriented economies. Programs characterized by uniform expenditures, uniform information coverage across regions, or uniform-density grid drilling progrmas are shown to be inferior to the strategy derived. Moreover, for market-oriented economies, the economically optimal mix in exploration activities between private and government data collection would require that only private firms assess local sites and that government agencies carry out regional surveys.     

Impact of China's currency valuation and labour cost on the US in a trade and exchange rate model

Ricardian dynamic general equilibrium analyses show that under free trade arrangements a low income country with lower wage cost and large endowment of labour has comparative advantage in trade. Efficiency gains from this enhance economic growth and welfare of households simultaneously in both low income and advanced economies. Theoretical predictions are empirically validated here with structural VAR analysis based on quarterly data over the time period 1995:1 to 2009:1 on China's relative wage cost, interest rate differential, real effective exchange rate (REER), relative GDP and the US current account balance. It is shown how the relative prices of labour, capital and the currency affect the economic activity in China and current account balance in the US. With free capital inflows and outflows and restrictions on labour mobility, comparative advantage of China and the trade deficit of the US will both be minimised if China allows real appreciation of the Yuan and complete adjustment in prices. Higher production cost and prices in China could reduce welfare of Chinese households and the trade imbalance of the US, while higher relative GDP of China lowers the current account balance for the US.     

International trade and hedging in economies in transition

This paper develops a general equilibrium framework to analyze risk management policies in economies in transition. By cross-hedging against real exchange rate risk exposures, these economies can increase their gains from international trade. We suggest that countries with emerging forward markets can gradually introduce the risk sharing markets, as limiting resources may prevent them from introducing complete hedging markets in the first place. Thus the growing demand for risk management instruments can be gradually met and it would be welfare enhancing. Economies in transition benefit when hedging devices are offered by financial markets, irrespective of whether the hedging instruments are de facto perfect or not.