3 - Transitional Recession and the Great Depression of the 1990s

Summary

Before the historic endeavor of transition to a market economy has been launched, the formerly centrally planned economies were growing. Indeed, they were growing fast. Over the four decades preceding the 1990s the annual rate of growth had averaged from 4.8 percent in the former Czechoslovakia to 8.2 percent in Romania. With such a pace of growth the national income was doubled in sixteen years in the former case, and in less than nine in the latter. However, growth under a centrally planned system had numerous specific features. At least five of them are worth mentioning in the context of the method of reasoning relevant in these considerations.

First, despite stubborn attempts of the governments—or indeed quite often because of their intervention in economic matters and owing to the bureaucratic allocation of resources—there were specific growth cycles (Bauer 1978, Kolodko 1976 and 1986). Although the output was growing systematically, the medium-term rate of growth was fluctuating up and down. There were periods of accelerated growth, and then—due to too extensive investment drive and the necessity to allocate more resources towards consumption's upgrading—there were periods of correction, during which the growth slowed down. Later, another expansion was launched and the sequence, by and large, was repeated (Table 1). These two features—the endogenous mechanism of periodical fluctuation and the relatively regular character of these changes—justify the interpretation of those processes as of a cyclical nature.

Second, the growth was of a ‘bad quality’, since even in relatively better performing economies the shortage syndrome was never eliminated entirely. That in turn was causing serious economic and political stress. Price distortions were leading to additional obstacles to sustaining a high and stable rate of growth. At the later stage, in some countries the shortages became accompanied by open (i.e., price/wage) inflation. Thus so-called ‘shortageflation’ syndrome had emerged (Kolodko and McMahon 1987). Consequently, growth was associated with lasting disequilibrium (Kornai 1986). Under the statist economy and central planning allocation that was just opposite to what was expected by the authorities.

Third, despite a high rate of growth the living standard was not improving fast enough. The socialist model of development had been based upon firm expansion of heavy industries and the investment drive, so consumption was always slowing down. Owing to the cyclical nature of growth, the rate of consumption growth fluctuated too, yet the highest variation was vis-à-vis the investments.