Multisectoral econometric models of the centrally planned economies and the disequilibria

The paper provides a systematic analysis of the properties of large econometric macro models built for the Centrally Planned economies of the '70s and '80s. A specific typology of macro models is introduced, distinguishing between the demand and quasi-demand determined systems on the one hand and the supply and quasi-supply determined systems on the other, and also between complete and incomplete models specifying only one side of economic activities (i.e. generating either demand or supply). It is shown that, under the command type economy, the incomplete, fully supply determined systems prevailed, generating production and showing its allocation. The economic reforms of the '80s, which aimed at a slow transition towards market economies, brought about a tendency towards constructing complete quasi-supply determined systems (especially for Poland and the CSRS). Since, in principle, they were built for shortage economies, the model builders had to allow for unobservables (final and intermediate demand, capacity utilization) and, on the other hand, for an increasing role of the financial phenomena (including prices) and financial policy instruments. A summary of the applications of macro models in forecasting and policy simulations is provided and new tendencies associated with regaining economic equilibria and approaching the market mechanisms emerging in the period of transition are shown.This is a revised and extended version of our paper delivered at the Project LINK Meeting in Paris, 1989 (see W. Welfe 1989b), which made use of our earlier publication (W. Welfe 1988).     

Informal pressures, mobilization, and campaigns in the management of centrally planned economies

Summary Following a short presentation of the striking deficiencies of plan instructions and financial regulation — the formal means of control of today's socialist centrally planned economies — we state that in actual fact these are not the basic means of control in these systems.The basic means of control is mobilization. Historically, this method originated from the declared unity of society. People — first of all economic managers — have to identify themselves with the objectives declared by the authorities. Moreover, the deficiencies of the formal means of control perpetuate the basic task assigned to mobilization.Campaigns are a specific kind of mobilization, meant for the implementation of new national economic objectives or tasks that have become newly important. Although mobilization facilitates the functioning of the economic system, we also have to underline two kinds of its negative consequences. First, mobilization oversimplifies the economic problems, tasks which in reality are tremedously complex. To be sure, some tasks can be implemented with its help, but certainly at high costs. Second, the never-ending repetition of the prevailing (campaign) slogans and the fact that they cannot be really contradicted weakens the capacity of central planners to forecast the future.This paper — the basic idea of which had already been present in Soós (1985) — was written while the author was visiting the European University Institute in April 1986, within the Research Project on East-West Trade and Financial Relations, directed by Professor D. M. Nuti. The paper was presented to the seminar of the working group on Comparative Economic Systems on 17 April 1986. The author wishes to thank Professor Paul Marer for his editorial help in preparing this final version.     

Taut plans, repressed inflation and the supply of effort in centrally planned economies

Conclusions In this paper we have developed a macroeconomic model of a centrally planned economy. In such an economy the use of taut plants to elicit greater supplies of effort from the work force is hampered by the inflationary pressures unleashed by the plan. Consequently the planners cannot, in general, optimize both the supply of effort and the supply of labour but rather must trade off one against the other.Planners may be able to alleviate inflationary pressures if they can impose wage discipline on enterprises or if they are willing to reduce investment. Both of these policies, however, have costs attached to them. Severe credit rationing designed to prevent upward wage drift may in fact reduce the output of enterprises by creating financial bottlenecks. Moreover, while upward wage drift does cause repressed inflation it may also be a way of moving workers from less efficient firms to more efficient ones and thus be useful in an allocational sense. Reductions in the volume of investment also represent a cost to planners since higher current output can be obtained only by sacrificing future output.We have also shown that the key mechanism driving our model, the link between disequilibrium in the market for consumer goods either at the micro-level or in the aggregate does exist. In our sample of East European countries there is a significant inverse relationship between deviations from the normal level of savings and deviations from the trend rate of growth of labour productivity, reflecting, we believe, fluctuations in the supply of effort by households.We are indebted to Zdenek Drabek, Michael Keren, Janos Kornai and J. Michael Montias for helpful comments. We also appreciate comments from the participants in the Ninth International Conference Models and Forecasts '85, Bratislava, Czechoslovakia, as well as from anonymous referees. Any errors and all opinions are, of course, entirely our responsibility.The research underlying this paper was supported by National Science Foundation Grant INT76-21084 and by funding from the National Council for Soviet and East European Research.     

A note on the aggregation of slack and shortage in centrally planned economies

This note attempts to identify the key methodological problems that remain unsolved in the controversy about the aggregation of slack and shortage in disequilibrium econometric models of centrally planned economies (CPEs). The procedure of smoothing by aggregation implemented by Burkett (1988) is critically reviewed and found wanting, despite possible attribution to Kornai (1980) for justification. We argue that the procedure neglects the problems of resource immobility and hoarding that have prevailed in CPEs. Even from a neo-Keynesian perspective, it is at odds with a rigorous microeconomics of rationing that takes into full account the substitution and income effects of spillovers. One important issue is that saving may actually be reduced because of a tightening of the ration. These considerations throw serious doubt on the validity of the smooth trade-off between slack and shortage that forms the basis for econometric estimation and lead to concern that the Walrasian configuration cannot be identified from the estimation results.I wish to thank Michael Artis, Paul Madden, Bernard Walters and two anonymous referees for useful comments, suggestions and criticisms. The issues reviewed in this note are admittedly controversial and I am solely responsible for all interpretations, opinions and errors.     

Exchange rates, tax-subsidy schemes, and the revenue from foreign trade in a centrally planned economy

Conclusions It has been argued that while in the traditional analysis of the classic CPE the exchange rate has only an accounting function, inappropriate methods of national income accounting can lead to changes in the exchange rate generating changes in the real economy, provided that trade in unbalanced in foreign currency prices. This thesis was explored by examining the way the profits from foreign trade were calculated by the Ministry of Foreign Trade, and then transferred to the state budget. It was shown that the correct measure of the state's increased command over domestic resources from engaging in foreign trade, derived from the implicit taxes on that sector, was the ministry's profits on its domestic operations, the first term in (2). However, evidence was presented which suggested that its profits on foreign currency account measured in domestic currency, the second term in (2), were also passed over to the state budget. This implies that transferred profits from foreign trade will overstate the underlying command over resources when there is a balance of payments surplus, and understate them when there is a deficit. The consequence of this is that the domestic economy faces a series of erratic, though small, inflationary and deflationary impulses, regardless of changes in the exchange rate.The theoretical role of the preisausleich system was explored in some detail and it was argued that, although the system has been designed to insulate the domestic economy from external disturbances, there were clear reasons why it had come to play a major part in revenue raising. Specifically, it is administratively convenient to tax resources at their point of entry into or exit from the economy; the taxation of foreign trade widens the tax base and reduces the visibility of the tax system. But, of course, this grafting onto the preisausgleich of a second major function of revenue raising does lead to the development of a further channel through which external disturbances can pass into the domestic economy. That is external disturbances impact on the domestic economy not only through the production and welfare effects of changing exports and imports, and through whatever tenuous links are allowed between foreign and domestic prices, but also insofar as those disturbances affect the ministry's profits from foreign trade. In short, foreign economic disturbances show up in variations in the position of the non-inflationary government budget constraint. To that extent the second function of the preisausgleich impairs its ability to perform its original insulation function. In a minor way, the successful non-inflationary performance of the insulation function has always required adjustments in the government budget constraint. But the growth in the importance of foreign trade taxation has magnified the importance of this phenomenon, and led to a trade-off between the two functions.University of Bath. Initial research for this paper was carried out under ESRC grant HRP 7417/1.     

Uncertainty in the terms of trade and the optimal structure of a small open economy

Conclusions The main conclusion to emerge is that in moving from a certain to an uncertain world, the optimal size of the import-competing sector does not fall. For the case of CU it will rise. For PU, whether it increases or not depends on the decision rule used and the ranking of probabilities. Similarly for RU, the form of the utility function and the probability distribution help to determine the size of the import-competing sector. From other simulations we have carried out, we are confident that our main conclusion is fairly robust for this model.     

A monopolistic-competition model of international trade with external economies of scale

This paper presents a two-country model of monopolistic competition in which differentiated products are produced subject to external economies of scale and two countries differ only in size measured by the factor endowment. It is shown that under free trade, the larger country has positive net exports of differentiated products, which leads to its gains from trade, while the smaller country may lose from trade. Noteworthy is that the industrial agglomeration induced by inter-industry trade is possibly harmful to both countries if the two countries are similar in size and the taste for product diversity is sufficiently strong.     

Capital-tax financing and scale economies in public-input production

Contrary to the dominant view of inefficient tax competition, Oates and Schwab (1991) show that capital-tax financing of public inputs leads to efficiency when the supply of these inputs is conditioned on business investment (Oates, W.E., Schwab, R.M., 1991. The allocative and distributive implications of local fiscal competition). This paper demonstrates that the cost structure of public-input production is relevant to their proposition on efficient capital-tax financing. That proposition holds if the per-unit cost of public inputs is exogenously fixed; however, it does not hold if public-input production exhibits scale economies. Also, this paper compares our analysis with the Zodrow-Mieszkowski model. That comparison illustrates the importance of the way public inputs are rationed to private firms.     

Spatially blind trade and fiscal impact policies and their impact on regional economies

The evidence for the US suggests that spatially blind policies often generate greater impacts on regional economic growth and development than policies specifically targeted at regions on regional issues generally. In this presentation, attention will be directed to two sets of national policies that have been promulgated without due consideration of their specific spatial (regional) impacts – trade policy and fiscal policy.Drawing on research conducted for the US, Japan and Brazil, an examination of trade policies will be presented, using the experience of NAFTA in North America and MERCOSUR in Brazil. Some further analysis of experience in Colombia will also provide insights into the role of national trade policy and, in the case of Colombia, fiscal decentralization policies. The second part of the presentation will examine fiscal policy impacts mediated through regional business cycles; the experience of Japan and the US will be examined.The results affirm the important implications that national (spatially blind) policies can have on regional economies; in the case of Brazil, trade policies have exacerbated already wide differentials in per capita income across states.     

Manipulation of the Walrasian mechanism in production economies with unbounded short-selling

Hurwicz (1979) and Otani and Sicilian (1982, 1990) characterized the Nash equilibrium allocations of the Walrasian demand manipulation game in successively more general exchange environments. In this paper, I extend the analysis to production economies with short-selling. First, I generalize Hurwicz’s and Otani and Sicilian’s theorem that any allocation at which each agent’s consumption bundle lies above her true offer curve can be supported in Nash equilibrium. I then show that for finite economies of any size the set of such allocations is often topologically large.Received: 17 January 2003, Accepted: 4 April 2005, JEL Classification: D51, D82For comments on this and earlier versions of the paper, I wish to thank Rick Bond, Bhaskar Chakravorti, Tom Gresik, Costas Syropoulos and William Thomson. I would especially like to thank Mike Jerison for helping to overcome a difficulty with a previous version. Also, the comments of the anonymous referees are gratefully acknowledged.     

Representation of transferable utility games by coalition production economies

We prove that, by the method of construction of a coalition production economy due to Sun et al. [Sun, N., Trockel, W., Yang, Z., 2008. Competitive outcomes and endogenous coalition formation in an n$n$-person game. Journal of Mathematical Economics 44, 853–860], every transferable utility (TU) game can be generated by a coalition production economy. Namely, for every TU game, we can construct a coalition production economy that generates the given game. We briefly discuss the relationship between the core of a given TU game and the set of Walrasian payoff vectors for the induced coalition production economy.     

Representation of non-transferable utility games by coalition production economies

We prove that every compactly generated non-transferable utility (NTU) game can be generated by a coalition production economy. The set of Walrasian payoff vectors for our induced coalition production economy coincides with the inner core of the balanced cover of the original game. This equivalence depends heavily on our representation. We exemplify that this equivalence need not hold in other representations. We also give a sufficient condition for the existence of a Walrasian equilibrium for our induced coalition production economy.