A gap in transition models?: A reply

Abstract

ALEC NOVE'S COMMENTS go to the heart of the ongoing debate concerning the role of economic policy in influencing the depth of the transformational recession and the start of any subsequent recovery. He is careful to make no firm propositions about the precise causes of decline. Nevertheless, he maintains that the observed deep falls in activity have been 'stimulated' by 'monetarist' deflation of demand and suggests that the state desertion of the real side of the economy has been excessive. He also argues, and this is his key proposition, that in order to halt decline and achieve stabilisation by the shock therapy route, it is vital to have and implement urgently a governmentcoordinated and co-financed investment strategy. Data for Russia are given in his Table 1 to support the first suggestion. The declines reported in the table unfortunately include large falls in 1991, the last pre-transition year, thus exaggerating significantly the impact of post-1991 policies. More importantly, Nove's interpretation of the figures fails to note that price liberalisation could not have been the only cause of the decline in real purchasing power. In fact, whenever there is a fall in output-of crude oil, arms, investment goods or exportables-the real revenue of the producing enterprises falls and, consequently, the real purchasing power of their workforces falls too. The initial falls of this kind are further magnified by the multiplier effect through the chain of suppliers. A large part of these falls takes place because, owing to limited mobility of resources, the product composition of the supply side cannot adjust instantly in the face of rapidly changing prices and demands during transition. Moreover, the official statistics in Nove's Table 1 fail to reflect unmeasured output. Goskomstat data on Russian consumer expenditure show that actual, survey-based, expenditure has fallen significantly less.1 According to these Goskomstat household survey data, 'by the second half of 1992, real expenditure on food had recovered to its average 1991 level; the real declines were in the consumption of non-food items like clothing and footwear, which were nearly halved'.2 Most importantly, to judge the role of economic policy in causing declines, one should seek a different type of evidence than that provided by Nove's Table 1. The relevant evidence is the strength of the relationship between the variation in GDP falls among countries and the variation in macroeconomic policy. The cumulative falls in measured GDP in transition countries vary significantly, from about 17% in Poland to about 50% in some republics of the former Soviet Union (FSU). However, to my knowledge there is no clear-cut evidence that the falls were lower when and where macroeconomic policies have been less restrictive. A link between the two probably exists, but it has been weak and dominated by other causes of decline. Some of the