Modelling the transition from a socialist to capitalist economic system

Modelling the transition from a socialist to capitalist economic system

Ivan O. Kitove-mail - [email protected]

http://www.ecokitov.narod.ru

The Fourth Annual EEFS Conference,Faculty of Economics, University of Coimbra, Portugal

19-22 May 2005

EU - big hopes and deterministic economic growth

Several Central and East European countries joined the EU in 2004

and some more will join it in 2007 ...

Is there a reasonable economic policy?

EEFS-2005 Conference

“Focus on the changes we observe in the global economy and

on the European Integration process”

- Macroeconomic issues and policy- Growth and development

- Regional economics and policy- New political economy

Transition from a socialist to capitalist system:history and future

1. Was economic growth in socialist countries at its potential level between 1950 and 2003? Comparison with capitalist countries.

2. Is economic performance of developed capitalist countries and socialist countries predefined?

3. Modelling the transition process between two stationary systems: socialist and capitalist

4. Are all the Former Socialist Counties capitalist already?

5. What is the economic future of the European and East European countries compared to that of the USA and leading European countries?

11/08/13 Modelling the transition from a socialist to capitalist system4

per capita real GDP: socialist vs. capitalist countries(Data Source: Groningen Growth and Development Centre and The Conference Board,

Total Economy Database, January 2005, http://www.ggdc.net )

Period of socialist system growth between 1950 and 1989

Was e

conom

ic grow

th in socialist countries at its potential level betw

een 1950 an

d 2003

?

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1940 1950 1960 1970 1980 1990 2000 2010

calendar year

per

capi

ta G

DP

, $ (

1990

)

BulgariaCzechoslovakiaHungaryPolandRomaniaYugoslaviaUSSRUSAFranceAustria GreeceJapan

http://www.ggdc.net/


Mean per capita GDP growth rate between 1950 and 1989

Average growth rate in the socialist countries is close to that of most developed countries but lower than that in Spain, Portugal and Greece

0.000

0.010

0.020

0.030

0.040

0.050

Austri

a

Belgiu

m

Denm

ark

Finlan

d

Franc

e

Gre

ece Italy

Nethe

rland

s

Norway

Portu

gal

Spain

Sweden

Switzer

land

Turke

yU.K

.USA

Bulga

ria

Czech

oslov

akia

Hunga

ry

Polan

d

Roman

ia

Yugos

lavia

USSR

mea

n G

DP

gro

wth

rat

e

Wa

s econom

ic grow

th in so

cialist countries at its po

tential level betw

een 19

50 and

2003?


Defining relationships

for capitalist economic growth

d(GDP(i))/dt=0.5(N(i)-N(i-1))/N(i-1)+1/Tcr(i-1) (1)

• d(GDP(i))/dt is the real GDP growth rate for time interval dt=i-(i-1)• N(i) is the number of people of some defined age, specific for each country

at time i,

Tcr(i)=Tcr(i-1)sqrt(1+d(GDP(i))/dt-dNT/NT) (2)

• Tcr is the duration of the period of mean income growth with increasing work experience

• dNT/NT is the relative change of total population above 15 years of age

Is econom

ic perform

ance of develope

d capitalist cou

ntries and so

cialist countrie

s predefined?


Mean personal income vs. work experience(Data Source: The U.S. Census Bureau, www.census.gov )

Tcr increases with economic growth

Tcr

Is econom

ic perform

ance of develope

d capitalist cou

ntries and so

cialist countrie

s predefined?

http://www.census.gov/


Real GDP growth rate in the USA: 1930 to 2003(Data Source: U.S. Department of Commerce, Bureau of Economic Analysis,

National Income and Product Accounts Table. Table 1.1.5, www.bea.gov )

The economic growth trend line and predicted GDP behaviour coincide

0.02

0.03

0.04

0.05

0.06

0 10000 20000 30000 40000 50000

per capita GDP, US dollars (1999)

GD

P g

row

th r

ate

real GDP average 10-year window

1/Tcr

Степенной (real GDP average10-year window)

0.15

0.17

0.19

0.21

0.23

0 10 000 20 000 30 000 40 000 50 000


GD

P g

row

th r

ate

real GDP per Capita +0.15

1/Tcr-dN/N+0.15

Степенной (real GDP per Capita+0.15)

Is econom

ic perform

ance of develope

d capitalist cou

ntries and so

cialist countrie

s predefined?

http://www.bea.gov/


Per capita GDP growth rate in Japan, France, Austria, and Greece:1950 to 2003

Developed capitalist countries follow the US economic pathper capita GDP growth rate = 21.72x(per capita GDP)-0.7052

Japan

0.05

0.1

0.15

0.2

0.25

0 5 000 10 000 15 000 20 000 25 000


GD

P g

row

th r

ate

per capita GDP + 0.1

USA (1/Tcr-dN/N+0.1)

Степенной (per capitaGDP + 0.1)

France

0.1

0.15

0 5 000 10 000 15 000 20 000 25 000


GD

P g

row

th r

ate




Austria

0.1

0.15

0.2

0 5 000 10 000 15 000 20 000 25 000


GD

P g

row

th r

ate




Greece

0.1

0.15

0.2

0.25

-1 000 1 000 3 000 5 000 7 000 9 000 11 000 13 000 15 000

per capita GDP, US dollars (1990)G

DP

gro

wth

rate




Is econom

ic performance

of developed capitalist cou

ntries and socialist cou

ntries predefined?


socialism hidden economy capitalism

1990

2005

0<q<p1>p>0

The transition schema

• Simultaneous processes of decay and growth• Conservation laws for population (nobody disappears or reappears) and for performance (predefined capitalist growth)

Modellin

g the transition process betw

een tw

o stationary system

s: socialist and cap

italist


M(t)=Ms(t)+Mc(t) Ms(t)=M0

sexp(-αst) Mc(t)=(1-M0

c)(1-exp(-αct))exp(αt)

Defining relationships for the transition from a socialist to capitalist system

M(t) - total per capita GDP at time t, Ms(t) and Mc(t) - portions of the socialist and capitalist systems

in the total per capita GDP, M(t), M0

s and M0c - initial portions of the socialist and capitalist system in the

total per capita GDP, M(0), (M0c=0, M0

s=1) αs - dissipation factor of the socialist system decayαc - dissipation factor of the capitalist system growthα - observed economic trend of the capitalist system growth

The model contains only three defining parameters

Modellin

g the transition process between tw

o stationary system

s: socialist and capitalist


M0s

Ms(t)=M0sexp(-αst)

Mhidden(t)=1-Ms(t)-Mc(t)

Mc(t)=(1-M0c)(1-exp(-αct))exp(αt)

0 (no socialist elements) 1 (pure capitalism)

Socialist system decay Growth of capitalism

Hidden economy

Per capita GDP in a socialist country Modellin

g the transition process between tw

o stationary system

s: socialist and capitalist


Modelling the transition period in Russia

Current status: almost no socialism (2%) 65% of population in the capitalist system 33% not in either of the main income distribution systems

Are a

ll the F

orm

er S

ocialist Coun

ties capitalist alrea

dy?


Modelling the transition period in Russia

1. Relatively fast decay of the socialist system and slow build up of the capitalist system presence, αc/αs=0.275

2. Two sources of the current economic growth in Russia:• increase of the capitalist system presence (2.2% per year)• internal growth of the capitalist system with an economic trend of 3.3%

• current per capita GDP growth rate = 1.022x1.033=1.073=7.3%

Are a

ll the F

orm

er S

ocialist Coun


dy?


Modelling the transition period in Hungary

Current status: no socialism (~0.15%) >97% of population in the capitalist system ~3% not in either of the main income distribution systems

Are a

ll the F

orm

er S

ocialist Coun


dy?


Modelling the transition period in Hungary

1. Very fast decay of the socialist system and fast growth of the capitalist system presence since 1990, αc/αs=0.562. Only one sources of current economic growth in Hungary:• internal growth of the capitalist system ~ 2.0% per year

Are a

ll the F

orm

er S

ocialist Coun


dy?


Modelling the transition period in Poland

Current status: no socialism (<0.1%) >97% of population in the capitalist system ~3% not in either of the main income distribution systems

Are a

ll the F

orm

er S

ocialist Coun


dy?


Modelling the transition period in Poland

1. Very fast decay of the socialist system and fast build up of the capitalist system presence since 1989, αc/αs=0.592. Only one sources of current economic growth in Poland:• internal growth of the capitalist system ~ 2.9% per year

Are a

ll the F

orm

er S

ocialist Coun


dy?


Modelling the transition period in Slovenia

Current status: no socialism (<1%) >93% of population in the capitalist system ~6% not in either of the main income distribution systems

Are a

ll the F

orm

er S

ocialist Coun


dy?


Modelling the transition period in Slovenia

1. Relatively fast decay of the socialist system and fast growth of the capitalist system presence since 1989, αc/αs=0.552. Two sources of the current economic growth in Slovenia:• increase of the capitalist system presence - 1.1% per year)• internal growth of the capitalist system - 2.0% per year

Are a

ll the F

orm

er S

ocialist Coun


dy?


Per capita GDP growth rate: observed and predicted

1. The capitalist growth rate for the studied countries is below the theoretical value except Estonia and Kazakhstan 2. East and Central European countries show per capita GDP growth between 1.5% and 3.0%

0

0.05

0.1

0.15

0.2

0 5000 10000 15000 20000

per capita GDP, $ (1990)

per

capi

ta G

DP

gro

wth

rat

e

US trend -(1/Tcr-dN/N)

theory

modelled growth rate

Степенной (US trend -(1/Tcr-dN/N))

EstoniaKazakhstan

Taj

ikis

tan

Are a

ll the F

orm

er S

ocialist Coun


dy?


per capita GDP, US$ αs αc α α-theory αc/αs

Poland 8080 0.39 0.23 0.029 0.038 0.590


Future for HungaryAssumption: Theoretical growth rate from 2005

1. Constant lag of the absolute per capita GDP of ~$230002. Decreasing ratio of US/Hungary per capita GDP

Wh

at is the econom

ic future of the C

entral and East E

uropean co

untries compared to th

at of the U

SA

and leadin

g Euro

pean countries


Future for Poland

Constant lag of about $27000

Wh

at is the econom

ic future of the C

entral and East E

uropean co

untries compared to th

at of the U

SA

and leadin

g Euro

pean countries


Conclusions

1. The transition process from socialism to capitalism can be described by a model defined by only three parameters having simple physical interpretations

2. Central European countries have completed transformation into capitalist countries

3. The countries of the FSU are building the capitalist system with a considerable lag

4. Most of Central and East European countries currently exhibit economic underperformance, except for Estonia (?)

5. The best case scenario guarantees in future a constant per capita GDP lag relative to that of USA

6. An increasing absolute per capita GDP lag relative to that of USA will be observed in the case of economic underperformance

Modelling the transition from a socialist to capitalist economic system

Economy & Finance

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