Transforming Post-Communist Political Economies (1998) / Chapter Skim
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8 Observations on the Speed of Transition in Russia: Prices and Entry
8 Observations on the Speed of Transition in Russia: Prices and Entry
Pages 203-222
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From page 203... ...
The empirical project suggests that Russia has made admirable progress toward achieving price liberalization, despite substantial obstacles to this reform. The theoretical analysis explains fragmentary evidence suggesting that start-ups and firms operating outside the residual state We have benefited from the comments of John McMillan, Werner Troesken, and participants in the workshop "Economic Transformation: Institutional Change, Property Rights and Corruption," organized by the National Research Council's Task Force on Economies in Transition.
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From page 204... ...
Next, we argue that new private firms in Russia face more discrimination in input and credit markets than do comparable firms in Central and Eastern Europe. Using a theoretical model, we show that the relatively slow development of competitive access to input and credit markets may explain some of the fragmentary evidence suggesting that start-ups have had a much more positive impact on the standard of living in Central and Eastern Europe than in Russia.
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From page 205... ...
private entrepreneurs often simply resold goods purchased or acquired from the state sector. PRICE LIBERALIZATION AND THE DEFINITION OF PROPERTY RIGHTS3 Price controls are no longer a major issue in the Central and Eastern European countries.
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From page 206... ...
and city governments adjusted, or even freed, regulated prices under their jurisdiction in January and February because they could not afford to pay their own producers subsidies for charging low prices. However, at the other extreme, locally initiated price controls were rampant in 1992 and 1993.
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From page 207... ...
In 1995, the governor of Pskov oblast and the Mayor of Moscow continued openly to regulate retail prices in their territories despite a federal edict prohibiting such controls (Borodulin, 1995~. In 1993 and 1994, agricultural producer prices were 30-40 percent lower than world prices for major commodities such as grain and meat.5 Federal policies that could have sustained these low prices, such as export controls, administrative prices, and mandatory state deliveries, were not in effect in 1993-1994.
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From page 208... ...
The manager and local government officials equate marginal revenue with marginal cost and pocket the difference between the market and posted prices. There are, however, two problems with using the Shleifer-Vishny model to explain locally initiated price controls.
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From page 209... ...
Thus, the Shleifer-Vishny model could apply to the imposition of "sneaky price controls." Local governments could charge an artificially low posted price to cover normal costs and collect monopoly rents in the form of unobserved side-payments. The persistence of low producer prices for agricultural goods and the low prices of many primary energy goods 7Shleifer and Vishny (1993:611)
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From page 210... ...
In this model, a locally regulated state firm and an unregulated private firm compete in price, subject to capacity constraints in the local market.8 The private firm maximizes profits, while the state firm maximizes a political objective represented as a weighted sum of consumer surplus and industry profits. In this scenario, a local government will set a low price that induces rationing in the state sector when the private sector has a small capacity, and therefore can be induced to behave competitively.
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From page 211... ...
In the potato market, where private capacity is much larger, state prices tended to be close to the market-clearing level prevalent in the private sector. This section has argued that many local governments in Russia ignored federally mandated price liberalization.
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From page 212... ...
n.a. = not available TABLE 8-2b Sample Means of Private Market/State Store Relative Prices Volga Regiona I, Region Milk Potatoes Astrakhan 3.44 1.29 Volgograd 5.15 1.38 Kamyshin 2.00 1.08 Samara 4.40 1.56 Syzran 2.50 1.50 Togliatti 2.24 1.72 Penza 1.63 1.44 Saratov 3.99 1.55 Balakovo 1.38 1.19 Ulyanovsk 2.38 2.20 Kazan 2.56 1.60 Average 2.96 1.50 aSample means are computed for the period February 1992-February 1995.
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From page 213... ...
NOTE: The first sample was taken on February 5, 1992; the last sample was taken on February 21, 1995. by resistant local governments, mafia activity, and inadequate infrastructure, Russia's efforts to implement economic reforms have generated tangible results: state prices have become responsive to changing market conditions, and important economic linkages are being forged across cities.
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From page 214... ...
Berkowitz et al. also assess the dynamic interaction between state and market prices within cities, with an eye toward determining whether state prices can be viewed as responsive to changes in market conditions, as represented by innovations in market prices.
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From page 215... ...
found evidence that "m causes s" for vegetable oil prices in 11 of the 13 cases they examined; in 8 of these cases, they also found that "s causes m," and hence concluded that there was feedback. In no case was the state price found to cause the market price exclusively; market conditions appear to be an important driving force behind changes in these prices.
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From page 216... ...
State firms have often been pressured by local governments to sell goods at artificially low prices. Berkowitz et al.'s evidence suggests that despite these problems, the importance of market forces in influencing state and market prices has clearly emerged following the Big Bang.
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From page 217... ...
Differences in the extent to which property rights are effectively enforced are a possible reason for the variance in performance of start-up private firms in Central and Eastern Europe and the New Independent States. An entrant has well-enforced property rights when it can compete with existing firms in obtaining the inputs and credits necessary to be profitable.
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From page 218... ...
In contrast, start-ups formed after the reforms of 1988 were often forced to engage in bribery to obtain necessary goods or credit. Preliminary evidence suggests that in many sectors, market allocation has replaced bureaucratic allocation more rapidly in Central and Eastern Europe than in Russia.l4 This suggests that the speed of development of input and credit markets is an important predictor of the long-run efficiency of emerging industries.
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From page 219... ...
Moreover, as Kornai (1990, 1992) argues, in the past bureaucrats opposed to reform have always used instances in which nonstate firms supplied lowquality goods or failed to alleviate chronic shortages as grounds for further interference with private activity.
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From page 220... ...
Thus, while local governments may have had a strong incentive to interfere with the price system, many appear to be no longer willing or able to do so. The chapter has also drawn some preliminary comparisons of the efficiency of start-ups in Russia and Central and Eastern Europe.
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From page 221... ...
1993 Private Business in Eastern Europe. Unpublished manuscript, January, M.I.T.
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From page 222... ...
Pp. 233-54 in The Czech Republic and Economic Transition in Eastern Europe, J
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