Structural change in transition
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The previous two chapters assessed the progress in reforms and economic performance in the transition countries. This chapter focuses on structural change as a key link between the two. Structural change has always been at the centre of the economic analysis of transition. Economic reforms were generally expected to lead to a substantial reallocation of resources in transition economies, rectifying the distortions inherited from the previous regime’s central planning. This reallocation in turn, while causing temporary adjustment costs reflected in the initial decline in output, would yield efficiency benefits and therefore support the subsequent recovery during the transition. This chapter reveals that those countries leading in reform have redressed most rapidly the structural distortions inherited from central planning and that this adjustment has contributed to their improved economic performance.
Structural change in transition economies has a number of dimensions, reflecting the various areas where central planning led to resource misallocation. The main dimensions considered in this chapter are the distribution of employment, the geographical orientation of trade, the growth of the private sector, the emergence of market-based finance and the development of infrastructure. All centrally planned economies had overdeveloped industrial sectors, when evaluated by their contribution to total GDP and total employment. Industrial downsizing is thus an important dimension of structural change. Trade patterns were distorted towards other socialist countries, and most centrally planned economies were not properly integrated into the world economy. The extent to which this has changed is examined here as an important dimension of adjustment. Private enterprises, commercial banks and capital markets as well as key areas of infrastructure were either completely absent in most centrally planned economies or severely stunted. Their growth is thus a key aspect of structural change during the transition. The choice of dimensions in this chapter also reflects the focus of previous Transition Reports and extends this previous analysis.
It might be expected that structural change would occur simultaneously in all these dimensions once markets had been liberalised and resources redeployed to their most efficient use. However, this chapter demonstrates that significant differences have emerged in structural adjustment patterns across dimensions. While adjustment has occurred across the board (or has been uniformly slow) in some areas, in others adjustment has varied far more systematically with progress in reform. Specifically, the chapter finds that the areas most sensitive to reform are trade orientation, private sector growth and infrastructure development, whereas adjustment has been uniform and fast in the redistribution of employment and uniform and slow in the emergence of market finance. A key difference in these two main patterns seems to be whether adjustment has involved the expansion or the contraction of activity. For example, while most employment adjustment has occurred as a result of the shedding of industrial jobs, trade reorientation has gone hand in hand with significant increases in trade with nontransition economies. Only small progress in reform is necessary to trigger the contraction of highly inefficient sectors, whereas much more consistent efforts to build competitive markets are needed to allow new opportunities to be realised.
The importance of structural change for transition goes beyond a simple process of resource reallocation from contracting to expanding sectors, however. Market economies also differ with respect to certain structural features, such as the openness to foreign trade, the nature of finance (banks versus securities markets), the size of government and the prevalence of the private sector in areas such as infrastructure, or the degree of economic inequality. These features can have significant implications for the rate of innovation, investment activity and long-term economic growth. The extent and nature of structural change can also have important effects on the political environment and the future path of structural reforms. The reallocation of resources from the state to the private sector can strengthen the demand for market institutions. However, partial liberalisation and some forms of privatisation can lead to high concentrations of economic power and to political obstacles to further reforms. The types of economic structures emerging in the transition economies are thus of interest much beyond the first decade of transition.
As with macroeconomic performance, the analysis of structural change in transition is fraught with measurement problems. The data employed in this chapter come from a variety of statistical sources, not always fully comparable across countries. Significant efforts have been made to adopt consistent definitions and to adjust national data accordingly, where data from a unified source were unavailable. Nonetheless, all results should be interpreted with caution. A particular problem in the analysis of structural change results from the need to benchmark the reallocation of resources to a market economy standard. This chapter builds on and extends the analysis in previous Transition Reports in estimating benchmark values from a cross-sectional model of economic structure in market economies, in most cases based on variations in GDP per capita.
The chapter begins by examining five dimensions of structural change: Section 4.1 looks at changes in the distribution of employment across broad sectors of the economy (industry, agriculture and services). Section 4.2 investigates the geographical reallocation of trade. Section 4.3 looks at various patterns in private sector development. Section 4.4 examines the emergence of market-based finance. Section 4.5 reviews developments in the provision of key infrastructure services. In each of these sections an attempt is made to gauge the impact of economic reforms on the pattern of adjustment. Section 4.6 draws the evidence together and establishes clusters of structural change measures that allow the analyst to trace a country’s progress along key dimensions simultaneously and to test any link to economic performance. Section 4.7 offers conclusions.
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