New structural economics meets European transition

Abstract

This paper explores whether new structural economics, and more broadly Structuralist approaches, could add to our understanding of transition in Central and Eastern Europe – and ultimately asks whether new structural economics and transition economics might be extended or integrated into a dynamic model of structural transformation that could better account for this particular development experience and provide policy guidance for the future. We have presented three perspectives – new structural economics, transition economics and the Neo-Schumpetarian approach – all of them emphasising different aspects of structural transformation. Their relative explanatory power depends on the context – for example, the extent of distortions in the economy, the quality of the institutions and where a country finds itself relative to the world technology frontier – and the questions we are interested in understanding. We suggest that, to date, the Neo-Schumpetarian approach offers the most promising and persuasive story line to think about this difficult challenge.

Keywords:

• new structural economics
• Central and Eastern Europe
• transition
• structuralist approaches
• transition economics
• Neo-Schumpetarian approach

Notes

1. Only 13 out of 101countries classified as middle income had become high income by the time of the global financial crisis in 2008 and a couple of them, Greece and Portugal, have since slipped back into middle-income status (World Bank 2012) Much effort has been spent on establishing at exactly which income level do economies get stuck in the so-called Middle Income Trap and why (Eichengreen, Park, and Shin 2013).

2. In fact, pursuing pro-competition beyond a certain level of competition may have counterproductive impact on innovation and productivity as the lower returns discourage firms from investing in developing new products or processes. The literature suggests a complex non-monotonic relationship between innovation and competition trading off the Schumpeterian effect with Arrowian replacement effect (for early evidence on countries in Central and Eastern Europe, see Djankov and Murrell (2002) and Carlin, Schaffer, and Seabright (2004)

3. For a more granular view of the differences of societies within Central Europe and the Baltics, see Bohle and Greskovits (2014). They distinguish between the neoliberal type in the Baltic states, the embedded liberal type in the Visegrad countries and the neocorporatist type in Slovenia. They also emphasise the heterogeneity within the countries of south-east Europe. Yet, all these economies share the features identified in the text, and in these regards, they are distinct from the varieties of capitalism in the rest of Europe and the United States.

4. A number of researchers find remaining traces in the landscape of values and attitudes of the Pale of Settlement, the line beyond which Jews were not allowed to settle in the Russian empire (Grosfeld and Zhuravskaya 2013; Acemoglu, Hassan, and Robinson 2011), and of the Ottoman and Habsburg empires (Becker 2011; Grosjean 2011). Using a similar methodology, researchers establish a lasting impact of the Second World War on today’s economic performance (Grosjean (2013) and Grosfeld and Zhuravskaya (2013)).

5. Another source of divergence is violent conflicts in the early years of transition. Most of the revolutions in Central and Eastern Europe were remarkably peaceful, but some countries, like Tajikistan and former Yugoslavia, experienced war during transition that still affect political trust and legitimacy. Grosjean (2013) find such effects from the Tajik civil war and the results from the Life in Transition Survey suggest a similar impact in the countries of the Western Balkan (EBRD 2011).

6. Reform effort by individual members in a “club” like the EU tends to be determined by the least efficient member, but the threat of creating clubs-in-clubs (e.g. the Eurozone within the EU) can help sustain reform momentum (Berglof et al. 2012).

7. As Rodrik (2008) has pointed out, pure horizontal industrial policy is a theoretical limit case, and is never really observed in reality, as every measure is likely to have different impact across sectors.

8. Not all economists agree that institutions are the main determinant of economic growth (see, for example, Shleifer (2012) who emphasises human capital. The value of human capital, of course, is influenced by institutions and vice versa, and the effectiveness of institutions is likely to be influenced by the quality of institutions. Banerjee and Duflo (2011) also emphasise that institutions are not destiny-development objectives can be achieved even when institutions are weak.

9. It could be argued that the Chinese government also paid close attention to institutions – it is just that they were different from those recommended by the Washington Consensus (e.g. two-tier pricing, ambiguous property rights and market liberalisation) and thus would not be picked up by standard measures of institutional quality. However, they certainly placed less emphasis on rule of law and democratisation of the political process.

10. Much of the extraordinary growth in China, particularly in the first two decades after the transition towards a market economy with “Chinese characteristics” started, came from the transfer of underemployed labour from agriculture to industrial production. Starting with the development of the township village enterprises and then massive growth of new private enterprises, the focus has shifted from the agriculture transition to increasing the value added. The current focus on institutions, in particular on high-level corruption, is of recent date.

11. Microsoft seems to have pursued a very lenient approach to copying in less advanced markets. Part of this can be about enforcement issues, but it could also be optimal to let users lock into Windows technology and then be trapped as enforcement of property rights gets tougher.

12. This is akin to what Hausman and Rodrik (2003) and Rodrik (2004) have called “self-discovery” where governments are engaged in a process of understanding what the critical constraints in the economy are. This is an understanding that, at least in part, has to come from genuine first-hand experience.

13. The European Commission has attempting to generate such dynamics in individual regions (Foray 2015).