"Gradualism" and "Big-Bang": a Consideration from Hayekian Perspective

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比較経済体制学会会報 第34巻 Bulletin of the Association for Comparative Economic Studies vol.34 On the Debate between "Gradualism" and "Big-Bang": A consideration from Hayekian perspective Hiroyuki Okon Wakayama University 1. Introduction After the collapse of socialism in 1989, one of the hottest subjects in economics is concerning with the choice of strategy for marketization of once centrally-planned economies. Tow types of strategies have been considered: "Gradualism" and "Big- Bang" . Chinese success with Gradualism and Russian failure with Big-Bang have intensified the debate between two strategies. Thus so great efforts have been devoted to make sure superiority of one strategy over the other. However, they are almost all, in a sense, in the field of empirical studies. Theoretical analysis of the transition still remain waiting for more greater efforts. One of the reasons for this unbalance between empirical studies and theoretical analysis is the belief that there is no appropriate theory to deal with the unprecedented experiment of transition of socialist economies to market economies. So some "new economics" have been invoked on, including institutional economics, evolutionary economics, or economics of transition. After a brief survey of the arguments on Gradualism and Big-Bang, I would like to insist that, besides of these new economics, a theoretical framework to tackle the trade cycle presented by Friedrich Hayek can provide a useful model to understand the transition of the ex-socialist economy to the market economy. The main purpose of this paper is to direct researcher's attention to the structural problem during marketization of the ex-socialist system. 2. Gradualism and Big-Bang: Two different strategies for marketization As for marketization of the ex-socialist economies, there has been two different approaches. We may call very generally one of them 'Gradualism' and the other 'Big- Bang' respectively. From Gradualism's point of view, we should marketize the ex-socialist economies gradually and partially. It emphasizes the institutional factors in the process from socialist to market economies. Because of its paying much attention to time dimension of the marketization and growth of institutional settings, Gradualism can be replaced by 81 'Evolutionism' . China provides one of good example of such evolutional and gradual strategy. On the other hand, Big-Bang is a position according to which we should and can marketize the ex-socialist economies as radically and thoroughly as possible. That is, we must move as fast as possible on macroeconomic stabilization, the liberalization of trade and prices, monetary convertibility, privatization, and so on. The proponents of this position, for instance Jeffrey Sachs, insist the complete removal of all government regulations in micro economic level and restricted intervention into macro economic level. Russia and Poland, for example, have adopted this neoclassical-pro-market strategy. 3. Three phases of the Gradualism-Big-Bang debate As for the debate between Gradualism and Big-Bang so far, we can divide it into three phases. The first phase is characterized by the enthusiasm in Big-Bang as the most efficient route from the socialist to the market system. From this invisible-hand perspective, all agenda for marketization, their sequence and speed to implement, and the policy strategy were discussed. At this stage, Gradualism was dominated by Big-Bang market euphoria. After a few years then, the second phase came. The poor economic performance led both policy makers and economists to their recognition that marketization might be more difficult, more complex, and more time-consuming process than they thought. Against Gig-Bang, some insisted superiority of Gradualism. What characterizes the third and present phase is a fact that we have many statistical economic data to evaluate the aptness of two strategies. From these statistics, we can observe different performances among countries which have embraced different strategies. As Chinese success with Gradualism is contrasted with Russian failure with Big-Bang, it came to be thought that in order to marketize the ex-socialist system we must chose appropriate strategy in the light of its initial condition. 4. The present state of the debate (1): Some points at issue. With different economic performances observed in the post-socialist economies, the following problems have been presented. (1) How can we evaluate the performances of the ex-socialist countries? (2) Can we relate the different performances with different strategies? (3) If we cannot, what is the reason for the difference of economic performances? (4) What explains China's success and Russia's failure? (5) Is this contrast of performances a proof of Gradualism's superiority over Big-Bang? (6) Can it possible to prove mathematically the dominance of one strategy over the other? In addition to these problems, we have another one. It is what Janos Kornai calls 82 'tra nsformational recession.' He observes that "All the postsocialist countries without exception are suffering from a grave economic recession." Thus we counts this homogeneous phenomena as the seventh problem. (7) Why have all the postsocialist countries experienced transformational recession? Of course, with regard to transition from the socialist system to the market system, there are many other problems. In contrast with seeming simplicity of the transition problem which we concieved immediately after the collapse of socialism, after all, we have now very diverse problems to solve. 5. The present state of the debate (2): A survey of recent inquiries. Here we shall survey some inquiries into the above problems. Sachs (1996) and others present 'Initial Conditions Matter Hypothesis'. According to this hypothesis, the contrast of economic performances between China and Russia must be explained by the different initial conditions which those countries had at the beginning of marketization; Russian economy has been industrialized and 'advanced', Chinese economy is a less developed one. Big-Bang, according to Sachs, is only possible option in Russia. Big-Bang policy is also defended from monetarist point of view. Aslund (1994) criticizes Gradualism of its approval of inflation. He ranks combating against inflation as the most important object to be pursued first. Yavrinski and Braguinsky (1994) explain the Russian failure with Big-Ban by their 'Hysteresis Effect Hypothesis'; because principle -agency relation before marketization has remained and made hysteresis effect, production declined. Dewatripont and Roland (1995) present a mathematical proof that, under conditions of high learning ability and low cost of collecting relevant information, Gradualism dominates Big-Bang. Because they consider the situation in which only two policies are implemented, we can not accept their proof as general propositions. But they have shown that the Gradualism-Big-Bang debate can be treated in more exact manners. Big-Bang is backed by neoclassical economics. After asked and examined its usefulness as the underpinning for marketization, Peter Murrell (1991) answers negatively. Instead, he picks up evolutionary economics for that paprt. It is then Gradualism that can be linked to evolutionary approach to transformation of the ex-socialist system. As for the problem (7) listed above, Kornai himself gives an explanation. We can call it '80% Keynesian -20% Hayekian Hypothesis .' According to this hypothesis, we can understand the transformational recession as follows. Inflation after the price liberalization and restrictive monetary policy eliminated potential effective demands. This decrease in effective demands caused the recession. To this Keynesian factor Kornai adds Hayekian one that marketization is a process of creative destruction which will coordinate demand structure and supply structure. 83 6. A criticism of present researches Although value of these researches can not denied, some criticism may be attempted. (1) Marketization must be analyzed explicitly as a "process." (2) Marketization is a process from socialist system to market system. (3) Although Dewatripont-Roland's conclusions shows a possibility for us to argue some general propositions about the proper strategy, they do not reflect specificity of marketization. (4) Is it necessary to seek for 'new' economics to analyze the process of marketization? And if we take into account a fact that, after the transformational recession, almost all countries show economic recovery (Figure 6-1), we should have the following as very important question to be tackled first. Figure 6-1 Gross Industrial Production. Source; Countries in Transition 1995. ed. by W•¬•¬W, 1995 * All 1994 data are prelimiuary. 84 important question to be tackled first. (5) What is to be explained is a kind of business cycle that happened during transition from the socialist system to the market system. In the light of these criticism, we must keep in mind the following points for our analysis of marketization. (a) The model is needed to be able to analyze marketization as a process. (b) The model is needed which considers the process as from the socialist system to the market system. (c) The model is needed to reflect main characteristic of the socialist system. If we take these points into account seriously, then we had better, I believe, treat the transition as "traverse" between two states with different structures of production. 7. The distorted production structure of the socialist system What is
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