Markets and growth in the post-communist world

This paper examines the linkages between policy-induced improvements in static and dynamic efficiency in factor markets and medium-to-long-term economic growth in post-communist or transition economies. The paper focuses on policies that promote accumulation of human and physical capital, and hence economic growth, as well as the development of social and natural capital and the linkages between efficiency and growth.

Financial markets in transition economies are first analysed, with consideration given to the communist legacy. Similar analysis is then made of labor markets. The paper then looks at product markets, followed by investigation into natural resources and agricultural markets.

Conclusions include:

• there were essentially no markets for factors of production under communism, market forces had little or nothing to do with the way capital and labor were allocated among alternative uses, therefore cumulative misallocations over time created gross inefficiencies that contributes significantly to the ultimate collapse of communism
• transition economies are set apart from other countries with a similar level of economic development by this initial high level of misallocation, massive initial inefficiencies suggest that the transition, if properly managed, would have been a period of rapid growth
• better banking systems and more developed primary financial markets could play an important role in accelerating growth rates in transition economies
• the lack of mortgage markets inhibits efficiency-improving reallocation of labor and lack of credit markets inhibits investment in human capital through student loans, emphasizing the link between financial and labor markets
• there is a strong inverse relationship between the fraction of a country’s wealth composed of natural capital and its growth rate, possibly because natural wealth is not subject to the same sorts of technological advance that physical and human capital can provide, so to the extent that large endowments of natural capital reduce the incentive to accumulate physical capital they may also reduce the rate of technological change
• There are common themes across all the markets studied, such as the lack of an appropriate legal and regulatory environment, the irony is that these countries frequently have excessive levels of regulation that inhibit efficient resource reallocation or growth-promoting investment while, at the same time, they lack the few simple rules regarding disclosure and insider-activity that are necessary for a market economy to function well