Performance of Economic Systems

The comparative performance of the former planned economies is an important

topic not only for what it says about basic performance issues, but also for what
it says about decline of those systems.
We will look at the performance issues by developing a performance profile of
socialist and capitalist systems and taking into account, as much as possible,
basic methodological issues.

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I. Problems of Evaluation
1. Choice of criteria
What criteria do we select to judge performance?
Different systems have different goals
It is difficult to evaluate the overall performance of the different ES, when different ES
pursue different goals and objectives. In one country econ growth may be important, in
other full employment, or equal income distribution. Evaluating econ performance is
not easy even if we isolate a single dominant objective, e.g. econ growth .
2. Statistical analysis
a) Cannot just compare any capitalist country with any socialist country
no way to know if they are representative of all capitalist and socialist
countries
something other than system is likely to be different: these other
differences may be causing the differences in performance, not system
b) Ideal solution is the natural experiment
random selection of large sample of countries in each of three systems
with a large enough sample and truly random assignment, each
sample will be identical except for system
any differences could then be attributable to system
but obviously, we cannot conduct a true experiment

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c) Samples already exist
and they are small (the market socialism sample contains only one
observation, Yugoslavia)
and they are very different in all sorts of ways other than just system
How do we know that differences in performance are due to differences in
system rather than other things?
This is the ceteris paribus problem

3. Ceteris paribus problem

How do we account for these other differences so that we can attribute
differences in performance to differences in system?
The economies compared should be alike in all aspects except their ES:

O = f (ES, ENV, POL)

Two approaches:
compare countries that are as alike as possible in all other respects
(e.g., East and West Germany, North and South Korea, India and
China)
econometric approachuse regression methods to control statistically
for these other effects
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Given the difficulties of evaluating ESs, we will use the most important
performance indicators:

II. Measures of Performance.

1. Economic growth
a priori expectations
what the data tell us
sources of growth
costs of growth
2. Efficiency
3. Income distribution
4. Economic stability

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III. Economic Profiles of the Sample Countries
1. Per capita GNP
GNP p it q it
market value of the sum of all goods and services produced in the
economy

a) Distribution very different for capitalist and socialist samples

no rich socialist countries (the richest socialist states are comparable to
Italy, Spain, Greece, and Venezuela)
This is a problem (if there are differences in performance, how will we
know whether the differences are due to economic system or level of
per capita GNP?)
We could try comparing socialist countries to capitalist countries of
comparable per capita GNP

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2. Level of economic development
a) Socialist states at a lower level of development
lower per capita GNP
much larger agricultural sector as proportion of total
output
in spite of low priority of agriculture in resource allocation
much smaller service sector
in part reflecting low priority of service sector

3. Economic diversity
a) Capitalist countries much more diverse
note shares of industry & services in Denmark and W. Germany
22 vs 53 industry
73 vs 44 services
specialization according to comparative advantage
b) Socialist countries much less diverse
not specializing according to comparative advantage
each trying to be as self-sufficient as possible
each emphasizing heavy industry and construction
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4. Population
a) Some large countries, some small in both samples
note how big China and India are
lower share of urban population in socialist countries

5. Feature of the socialist development model is:

A high share of resources devoted to agriculture in recent
years.
Relative neglect of services.
Emphasis on heavy industry.
Relatively low rates of urbanization.

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IV. Economic Growth
1. Prior expectation that planned socialism would generate
more rapid growth
a) state ownership of income generating resources
b) high level of forced saving
c) growth was a high priority of centralized allocation
d) lower level of economic development

It didnt happen:
sometimes socialist economies grew more rapidly,
sometimes capitalist countries did, overall about equal
Figure 13.1
take out China and capitalist countries grew more
socialist economies on average experienced continual
slowdown starting late 70s

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2. Controlling for national income level Table 13.2
a) Growth negatively correlated with national income
Countries with low per capita income have grown more rapidly as a group.
b) Compare socialist economies with capitalist countries at similar level of
national income
Spain, Greece, Italy, Venezuela
capitalist economies grew more rapidly for the entire postwar
period; the unweighted average annual growth for the 4 countries
6% versus 4.5%, even with China included
4.25% versus 3.8% per capita
c) Compare China and India
similar level of income and development at beginning of socialist period
in China
very different culturally, however
China grew more rapidly (6.9% versus 4.1% from 1960 to 1991)
d) Compare China with other Asian, capitalist economies
Taiwan, South Korea, Singapore
more similar culturally
the capitalist countries grew much more rapidly than China

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3. Conclusions concerning growth
a) Capitalist economies grew at least as fast, on average, in spite of socialist
advantages (state ownership, high level of forced savings, growth a high
priority of centralized allocation, lower level of econ development)
b) Controlling for level of development, capitalist economies appear to have
grown more rapidly
c) Socialist economies (with the exception of China) experienced significant
downturn starting in late 70s while capitalist countries continued on trend

4. The Sources of Economic Growth

a) Growth can come from having more resources with which to produce
more
extensive growth (expansion of inputs)
for instance, population growth leading to increase in labor but not
necessarily per capita growth
increase in female labor market participation rate
increase in capital made possible by saving
b) Growth can come from making resources more productive
intensive growth (technological progress)
c) Intensive growth more desirable than extensive
extensive growth requires more work (less leisure) or more saving (less current
consumption) or both
intensive growth means working more efficiently

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 5. Consumption Costs of Growth
a) Consumption growth greater in capitalist economies
than in socialist
4.7% versus 3.6% per annum
b) Recall that output growth was similar in both systems
c) Thus, cost in terms of sacrificed current consumption
greater in socialist economies

V. Economic efficiency
1. Dynamic -efficiency performance over time-the extent
to which output expands more rapidly than inputs, the
difference being the growth rate of factor productivity
a) usually measured by comparing the growth of output

and factor inputs
L growth rate of aggregate employment
K
Q
growth rate of reproducible capital

Q L
growth rate of aggregate output

growth rate of labor productivity
Q K

growth rate of capital productivity 14
L K growth rate of total factor inputs

L K K wK L wL
wK capitals share of income
wL labors share of income

Q ( L K )

The rate of growth of total factor productivity

(growth of efficiency)

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 Example:
GDP is growing at 11 percent per annum, labor at 2
percent per annum, and capital at 11 percent per annum.
The capital/output ratio is remaining steady
the rate of growth of capital productivity is 11%-11%=0
The rate of growth of labor productivity is positive 9%
11%-2%=9%
If labor accounts for 75 % of income and capital for 25 %, the
rate of growth of total factor productivity is between the rate of
growth of labor productivity and that of capital productivity, or
6.75%:

Rate of growth of total factor inputs:
L K K wK L wL 0.75 * 2% 0.25 *11% 1.5 2.75 4.25%

Q ( L Rate
K )ofgrowth
11 4of.25
totalfactor
6.75productivity
% (growth of efficiency):

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2. Static efficiency
the effectiveness with which a system utilizes its available resources at a
particular time
Measure of static efficiency is how close the economy is to operating on its
production possibilities frontier.

VI. DataTable 13.4 and Figure 13.2

1. Growth of labor and capital similar in both systems
2. Productivity growth slows after 1960 in both
Slowdown worse in socialist economies
output growth in socialist economies slows by 40%
yet input growth increases
thus socialist growth becomes more extensive after 1960
3. In socialist economies output growth was 5.2% per annum between 1950 and 1960
while productivity growth was 3.5%
4. Thus, growth was 67% intensive (3.5/5.2)
5. After 1960, growth was only 30% intensive (0.9/3.0)
6. In capitalist countries, growth was 65% intensive (3.0/4.8) in 50s and 49% (1.8/3.7)
afterwards.
7. Thus, growth similar in both systems during 1950-1960
8. During 1960-1985, growth becomes more extensive in both systems
9. But growth becomes much more extensive in socialist economies than in capitalist
10. Overall, growth in socialist economies has been more extensive than capitalist
growth
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VII. Income Distribution
1. Prior expectation is that socialist economies would have
more equal distribution
socialist goal
state ownership of income-producing resources other than labor
2. Gini Coefficient: Czech 0.21 Sweden, UK 0.25
early 1970s Hungary 0.24 Canada 0.34
Poland 0.24 USA 0.35
3. In general, socialist economies have more equal
distributions
4. But UK and Sweden have distributions that are similar to
socialist
5. Often considerable inequality in access to goods and
services in socialist economies depending on ones
position in the Party hierarchy
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VIII. Economic Stability
Note that variability of growth less for socialist
economies, at least until 1980s
Socialist economies tended to exhibit greater stability
through most of the post-war period
Prices more stable in planned economies, on average.

IX. Summary
1. Socialist economies unable to achieve higher growth in
spite of seeming advantages (if controlling for level of
development, socialism did worse)
2. Capitalist countries appear to be more efficient (at least,
their resources are much more productive)
3. Distribution of income tends to be more equal in socialist
economies
(but some capitalist economies were able to achieve distributions
in line with socialist economies)
4. Socialist economies more stable at least until the 1980s
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X. Reasons for Economic Decline in the Planned Socialist
Systems
1. Production function analysis
Diminishing returns to capital
Lack of technological progress
2. Problems with info and incentives
3. Complexity
4. Development
emphasized heavy industry at the expense of consumer goods.

XI. Collapse of Communism

1. Gorbachev Reforms in Soviet Union (glasnost and perestroika, 1985)
greater freedom of speech and press
elections to parliaments and city councils
emigration and travel permitted
2. Fall of Berlin Wall (1989)
3. Reunification of Germany (1990)
4. Dissolution of Warsaw Pact (1989-90)
5. Transition in Eastern Europe to market economies

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